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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Form 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended December 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 1-3071
Hanover Compressor Company
(Exact name of registrant as specified in its charter)
Delaware 76-0625124
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12001 North Houston Rosslyn, Houston, Texas 77086
(Address of principal executive offices)
(281) 447-8787
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $.001 par value
Name of each exchange in which registered: New York Stock Exchange, Inc.
Securities registered pursuant to 12(g) of the Act:
Title of class: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the registrant held by
nonaffiliates as of March 30, 2001: $1,580,100,000. This calculation does not
reflect a determination that such persons are affiliates for any other purpose.
Number of shares of the Common Stock of the registrant outstanding as of
March 30, 2001: 69,022,512 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 17, 2001 (to be filed on or before April 30,
2001) are incorporated by reference into Part III, as indicated herein.
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EXPLANATORY NOTE
Hanover Compressor Company (the "Company") is filing this amendment to its
Annual Report on Form 10-K for the year ended December 31, 2000 in order to
restate the Consolidated Financial Statements and make appropriate conforming
revisions to "Management's Discussion and Analysis of Financial Condition and
Results of Operations." In conjunction with a separate review of the Company's
joint ventures and other transactions conducted by the Board of Directors in
early 2002, the Company determined that restatement was appropriate. The net
effect of this restatement for the year ended December 31, 2000 was as follows:
(i) a decrease in revenues of $37.7 million, from $603.8 million to $566.1
million; (ii) a decrease in income before income taxes of $12.0 million, from
$93.5 million to $81.5 million; (iii) a decrease in net income of $7.5 million,
from $58.7 million to $51.2 million; and (iv) a decrease in earnings per common
share of $0.12 basic and $0.11 diluted. For additional detail of the
transactions involved in the restatement and their impact on the Consolidated
Financial Statements, see Note 19 of the Notes to Consolidated Financial
Statements.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report on Form 10-K are "forward-
looking statements" intended to qualify for the safe harbors from liability
established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes",
"anticipates", "expects", "estimates" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those anticipated as of the date of this report. The risks and
uncertainties include (1) the loss of market share through competition; (2) the
introduction of competing technologies by other companies; (3) a prolonged
substantial reduction in oil and gas prices which would cause a decline in the
demand for our compression and oil and gas production equipment; (4) new
governmental safety, health and environmental regulations which could require
us to make significant capital expenditures; (5) inability to successfully
integrate acquired businesses; and (6) changes in economic or political
conditions in the countries in which the Company operates. The forward-looking
statements included herein are only made as of the date of this report and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
1
Item 1. Business
General
Hanover Compressor Company (the "Company") was incorporated in Delaware in
1990 and is a leading provider of natural gas compression, gas handling and
related services in the United States and select international markets. As of
December 31, 2000, the Company operated a fleet of 4,840 compression rental
units with an aggregate capacity of approximately 2,151,000 horsepower. The
Company's compression services are complemented by its compressor and oil and
gas production equipment fabrication operations and gas processing, gas
treatment, gas measurement and power generation services.
The Company believes that it currently is the largest natural gas
compression company in the United States on the basis of aggregate rental
horsepower with 4,410 rental units having an aggregate capacity of
approximately 1,741,000 horsepower at December 31, 2000. Internationally, the
Company estimates it is one of the largest providers of compression services in
the rapidly growing Latin American and Canadian markets, operating 430 units
with approximately 410,000 horsepower at December 31, 2000.
The Company's products and services are essential to the production,
processing, transportation and storage of natural gas and are provided
primarily to energy producers and distributors of natural gas. The Company's
decentralized operating structure, technically experienced personnel and high
quality compressor fleet allow the Company to successfully provide reliable and
timely customer service. As a result, the Company has experienced substantial
growth over the past five years and has developed and maintained a number of
long-term customer relationships. This has enabled the Company to maintain an
average horsepower utilization rate of approximately 93% from 1994 to 2000,
compared to industry rates, which the Company believes to have been 80% to 85%
for this period.
The Company currently competes primarily in the market for transportable
natural gas compression units of up to 4,450 horsepower. This market, which
includes rental and owner operated units, accounts for over 14.9 million
horsepower in the United States in 1999 and is believed to have grown at a
compound annual rate of 8% since 1992. The Company believes that the growth in
the domestic gas compression market will continue due to the increased
consumption of natural gas, the continued aging of the natural gas reserve base
and the attendant decline of wellhead pressures, and the discovery of new
reserves.
The rental portion of the domestic gas compression market was estimated to
comprise approximately 4.8 million horsepower amounting to 31% of the aggregate
U.S. horsepower. Growth of rental compression capacity in the U.S. market is
primarily driven by the increasing trend toward outsourcing by energy producers
and processors. The Company believes that outsourcing provides the customer
greater financial and operating flexibility by minimizing the customer's
investment in equipment and enabling the customer to more efficiently resize
compression units to meet the changing reservoir conditions. In addition, the
Company also believes that outsourcing typically provides the customer with
more timely and technically proficient service and necessary maintenance which
often reduces operating costs. Internationally, the Company believes similar
growth opportunities for compressor rental and sales exist due to (i) increased
worldwide energy consumption, (ii) implementation of international
environmental and conservation laws preventing the flaring of natural gas, and
(iii) increased outsourcing by energy producers and processors.
2
Compressor Rental Fleet
The size and horsepower of the Company's compressor rental fleet owned or
operated under lease on December 31, 2000 is summarized in the following table.
Number Aggregate % of
Range of Horsepower per Unit of Units Horsepower Horsepower
---------------------------- -------- ---------- ----------
(in thousands)
0-99................................................ 1,531 124 5.75%
100-199............................................. 1,110 156 7.27%
200-499............................................. 869 300 13.96%
500-799............................................. 395 280 13.00%
800-1199............................................ 410 424 19.72%
1200-2699........................................... 496 757 35.21%
2700-UP............................................. 29 110 5.09%
----- ----- ------
Total........................................... 4,840 2,151 100.00%
===== ===== ======
Industry Overview
Gas Compression
Typically, compression is required several times during the natural gas
production cycle: at the wellhead, at the gathering lines, into and out of gas
processing facilities, into and out of storage, and throughout the intrastate
and interstate pipelines.
Over the life of an oil or gas well, natural reservoir pressure and
deliverability typically decline as reserves are produced. As the natural
reservoir pressure of the well declines below the line pressure of the gas
gathering or pipeline system used to transport the gas to market, gas no longer
naturally flows into the pipeline. It is at this time that compression
equipment is applied to economically boost the well's production levels and
allow gas to be brought to market.
In addition to such gas field gathering activities, natural gas compressors
are utilized in a number of other applications, all of which are intended to
enhance the productivity of oil and gas wells, gas transportation lines and
processing plants. Compressors are used to increase the efficiency of a low
capacity gas field by providing a central compression point from which the gas
can be removed and injected into a pipeline for transmission to facilities for
further processing. As gas is transported through a pipeline, compression
equipment is applied to allow the gas to continue to flow in the pipeline to
its destination. Additionally, compressors are utilized to re-inject associated
gas to lift liquid hydrocarbons artificially which increases the rate of crude
oil production from oil and gas wells. Furthermore, compression enables gas to
be stored in underground storage reservoirs for subsequent extraction during
periods of peak demand. Finally, compressors are often utilized in combination
with oil and gas production equipment to process and refine oil and gas into
higher value added and more marketable energy sources.
Changing well and pipeline pressures and conditions over the life of a well
often require producers to reconfigure their compressor units to optimize the
well production or pipeline efficiency. Due to the technical nature of the
equipment, a dedicated local parts inventory, a diversified fleet of natural
gas compressors and a highly trained staff of field service personnel are often
necessary to perform such functions in the most economic manner. These
requirements, however, have typically proven to be an extremely inefficient use
of capital and manpower for independent natural gas producers and have caused
such firms, as well as natural gas processors and transporters, to increasingly
outsource their non-core compression activities to specialists such as the
Company.
The advent of rental and contract compression roughly 40 years ago made it
possible for natural gas producers, transporters and processors to improve the
efficiency and financial performance of their operations. Compressors leased
from specialists generally have a higher rate of mechanical reliability and
typically
3
generate greater productivity than those owned by oil and gas operators.
Furthermore, because compression needs of a well change over time, outsourcing
of compression equipment enables an oil and gas operator to better match
variable compression requirements to the production needs throughout the life
of the well. Also, certain major domestic oil companies are seeking to
streamline their operations and reduce their capital expenditures and other
costs. To this end, they have sold certain domestic energy reserves to
independent energy producers and are outsourcing facets of their operations.
Such initiatives, in the opinion of the Company, are likely to contribute to
increased rental of compressor equipment.
Natural gas compressor fabrication involves the design, fabrication and sale
of compressors to meet the unique specifications dictated by the well pressure,
production characteristics and the particular applications for which
compression is sought. Compressor fabrication is essentially an assembly
operation in which an engine, compressor, control panel, cooler and necessary
piping are attached to a frame called a "skid". A fabricator typically
purchases the various compressor components from third party manufacturers, but
employs its own engineers and design and labor force.
In order to meet customers' needs, gas compressor fabricators typically
offer a variety of services to their customers including: (i) engineering,
fabrication and assembly of the compressor unit; (ii) installation and testing
of the unit; (iii) ongoing performance review to assess the need for a change
in compression; and (iv) periodic maintenance and replacement parts supply.
Production Equipment
Oil and gas reserves are generally not commercially marketable as produced
at the wellhead. Typically, such reserves must be refined before they can be
transported to market. Oil and gas production equipment is utilized to separate
and treat such oil and gas immediately after it is produced in order to
facilitate further processing, transportation and sale of such fuels and
derivative energy sources. Oil and gas production equipment is typically
installed at the wellhead immediately prior to commencing the large scale
production phase of a well and remains at the site through the life of the
well.
Market Conditions
The Company believes that the most fundamental force driving the demand for
gas compression and production equipment is the growing consumption of natural
gas. As more gas is consumed, the demand for compression and production
equipment increases.
Additionally, although natural gas has historically been a more significant
source of energy in the United States than in the rest of the world, the
Company believes that aggregate foreign natural gas consumption (excluding the
former Soviet Union) has recently grown. Despite significant growth in energy
demand, most non-U.S. energy markets, until recently, have typically lacked the
infrastructure necessary to transport natural gas to local markets, and natural
gas historically has been flared at the wellhead. Given recent environmental
legislation and the construction of numerous natural gas-fueled power plants
built to meet international energy demand, the Company believes that
international compression markets are experiencing growth.
Natural gas is considered to be the "fuel of the future" because it provides
the best mix of environmental soundness, economy and availability of any energy
source. Rising worldwide energy demand, environmental considerations, the
further development of the natural gas pipeline infrastructure and the
increasing use of natural gas as a fuel source in power generation are the
principal reasons for this steady growth.
While gas compression and production equipment typically must be highly
engineered to meet demanding and unique customer specifications, the
fundamental technology of such equipment has been stable and has not been
subject to significant technological change.
4
Business Segments
The Company's revenues and income are derived from five business segments
(comprising four operating divisions)--domestic compression rentals;
international compression rentals; parts, service and used equipment;
compressor fabrication; and production and processing equipment fabrication.
The domestic and international compression rentals segments have operations
primarily in the United States, Canada and South America. For financial data
relating to the Company's divisions, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 18 to the Notes to
the Consolidated Financial Statements.
Compression Services and Fabrication
The Company provides its customers with a full range of compressor rental,
maintenance and contract compression services. As of December 31, 2000, the
Company's gas compressor fleet consisted of 4,840 units, ranging from 24 to
5,000 horsepower per unit. The size, type and geographic diversity of this
rental fleet enable the Company to provide its customers with a range of
compression units that can serve a wide variety of applications and to select
the correct equipment for the job, rather than trying to "fit" the job to its
fleet of equipment.
The Company bases its gas compressor rental rates on several factors,
including the cost and size of the equipment, the type and complexity of
service desired by the customer, the length of the contract, and the inclusion
of any other services desired, such as installation, transportation and the
degree of daily operation. Substantially all of the Company's units are
operated pursuant to "contract compression" or "rental with full maintenance"
contracts under which the Company performs all maintenance and repairs on such
units while under contract. In the United States onshore market, compression
rental fleet units are generally leased under contract with minimum terms of
six months to two years, which convert to month-to-month at the end of the
stipulated minimum period. Historically, the majority of the Company's
customers have extended the length of their contracts, on a month-to-month
basis, well beyond the initial term. Typically, the Company's compression
rental units utilized in offshore and international applications carry
substantially longer lease terms than those for onshore domestic applications.
An essential element to the Company's success is its ability to provide its
compression services to customers with contractually committed compressor run-
times of between 95% and 98%. Historically, run-time credits have been
insignificant, due largely to the Company's rigorous preventive maintenance
program and extensive field service network which permits the Company to
promptly address maintenance requirements. The Company's rental compressor
maintenance activities are conducted at 13 facilities staffed by approximately
700 experienced and factory-trained maintenance personnel both at these
facilities and in the field. Such maintenance facilities are situated in close
proximity to actual rental fleet deployment to permit superior service response
times.
All rental fleet units are serviced at manufacturers' recommended
maintenance intervals, modified as required by the peculiar characteristics of
each individual job and the actual operating experience of each compressor
unit. Prior to the conclusion of any rental job, the Company's field management
evaluates the condition of the equipment and, where practical, corrects any
problems before the equipment is shipped out from the job site. Although
natural gas compressors generally do not suffer significant technological
obsolescence, they do require routine maintenance and periodic refurbishing to
prolong their useful life. Routine maintenance includes alignment, compression
checks, and other parametric checks which indicate a change in the condition of
the equipment. In addition, oil and wear-particle analysis is performed on all
units prior to their redeployment at specific compression rental jobs.
Overhauls are done on a condition-based interval instead of a time-based
schedule. In the Company's experience, these rigorous procedures maximize
component life and unit availability and minimize avoidable downtime.
Typically, the Company overhauls each rental compressor unit for general
refurbishment every 36 to 48 months and anticipates performing a comprehensive
overhaul of each rental compressor unit every 60 to 72 months. This maintenance
program has provided the Company with a highly reliable fleet of compressors in
excellent condition.
5
The Company's field service mechanics provide all operating and maintenance
services for each of the Company's compression units leased on a contract
compression or full maintenance basis and are on-call 24 hours a day. Such
field personnel receive regular mechanical and safety training both from the
Company and its vendors. Each of the Company's field mechanics is responsible
for specific compressor unit installations and has at his disposal a dedicated
local parts inventory. Additionally, each field mechanic operates from a fully-
equipped service vehicle. Each mechanic's field service vehicle is radio or
cellular telephone equipped which allows that individual to be the Company's
primary contact with the customer's field operations staff and to be contacted
at either his residence or mobile phone 24 hours a day. Accordingly, the
Company's field service mechanics are given the responsibility to promptly
respond to customer service needs as they arise based on the mechanic's trained
judgment and field expertise.
The Company considers itself to be unique in its industry in that its sales
and field service organizations enjoy managerial parity within the Company,
enabling these two vital organizations to work together in a highly coordinated
fashion in order to deliver maximum customer service, responsiveness and
reliability. The foundation for the Company's successful field operations
effort is the experience and responsiveness of its over 700 member compressor
rental field service and shop staff of factory-trained and field-tested
compressor mechanics. The Company's field service mechanics are coordinated and
supported by regional operations managers who have supervisory responsibility
for specific geographic areas.
The Company's compressor fabrication operations, doing business as Hanover
Maintech and Hanover Dresser-Rand (acquired in September 2000), design,
engineer and assemble compression units for sale to third parties as well as
for placement in its compressor rental fleet. As of December 31, 2000, the
Company had a compressor unit fabrication backlog for sale to third parties of
$43.8 million compared to $2.2 million as of December 31, 1999. The increase in
backlog is primarily attributable to Hanover Dresser-Rand which was acquired in
September 2000. Substantially all backlog is expected to be produced within a
90 to 120 day period. In general, units to be sold to third parties are
assembled according to each customer's specifications and sold on a turnkey
basis. Components for such compressor units are acquired from third party
suppliers.
Oil and Gas Production Equipment
The Company, through its operations doing business as Hanover Smith and
Hanover Applied Process Solutions, Inc. (acquired in June 2000), design,
engineer, fabricate and either sell or occasionally rent a broad range of oil
and gas production equipment designed to heat, separate, dehydrate and measure
crude oil and natural gas. The product line includes line heaters, oil and gas
separators, glycol dehydration units and skid-mounted production packages
designed for both onshore and offshore production facilities. The Company
generally maintains standard product inventories in excess of $5 million and is
therefore able to meet most customers' rapid response requirements and minimize
customer downtime. As of December 31, 2000, the Company had a production
equipment fabrication backlog of $47.1 million compared to $2.8 million as of
December 31, 1999. The increase in backlog is primarily attributable to Hanover
Applied Process Solutions, Inc. which was acquired in June 2000. Substantially
all backlog is expected to be produced within a 90 to 120 day period. The
Company also purchases and reconditions used production equipment which is then
sold or rented. As the Company's customers look to the Company to provide an
ever-widening array of outsourced services from wellhead to end-user, the
Company continues to build on its core business with emerging business
opportunities such as turnkey gas treating, gas measurement and power
generation sales and services.
Market and Customers
The Company's customer base consists of over 1,200 U.S. and international
companies engaged in all aspects of the oil and gas industry, including major
integrated oil and gas companies, large and small independent producers,
natural gas processors, gatherers and pipelines. Additionally, the Company has
negotiated more than 15 strategic alliances or preferred vendor relationships
with key customers pursuant to which the Company receives preferential
consideration in customer compressor and oil and gas production
6
equipment procurement decisions in exchange for enhanced product availability,
product support, automated procurement practices and limited pricing
concessions. No individual customer accounted for more than 10% of the
Company's consolidated revenues during 2000 or 1999.
The Company's domestic compressor leasing activities are currently located
in Texas, Oklahoma, Arkansas, Louisiana, New Mexico, Mississippi, Alabama,
Kansas, Colorado, California, Utah, Illinois, Kentucky, Missouri, Montana,
Nebraska, Nevada, New York, Pennsylvania, Tennessee, Virginia, West Virginia,
Wyoming and offshore Gulf of Mexico. International locations include Argentina,
Venezuela, Colombia, Trinidad, Bolivia, Mexico, Indonesia, Nigeria and Canada.
As of December 31, 2000, approximately 14% and 17% of the Company's compressor
horsepower was being used in offshore and international applications,
respectively.
Sales and Marketing
The Company's more than 70 salespeople report to three sales vice
presidents. The sales vice presidents report to the Company's Senior Vice
President of Sales. The Company's salespeople aggressively pursue the rental
and sale market in their respective territories for compressors and production
equipment. Each salesperson is assigned a customer list on the basis of the
experience and personal relationships of the salesperson and the individual
service requirements of the customer. This customer and relationship-focused
strategy is communicated through frequent direct contact, technical
presentations, print literature, print advertising and direct mail. The
Company's advertising and promotion strategy is a "concentrated" approach,
tailoring specific messages into a very focused presentation methodology.
Additionally, the Company's salespeople coordinate with each other to
effectively pursue customers who operate in multiple regions. The salespeople
maintain intensive contact with the Company's operations personnel in order to
promptly respond to and satisfy customer needs. The Company's sales efforts
concentrate on demonstrating the Company's commitment to enhancing the
customer's cash flow through superior product design, fabrication,
installation, customer service and after-market support.
Upon receipt of a request for proposal or bid by a customer, the Company
assigns a team of sales, operations and engineering personnel to analyze the
application and prepare a quotation, including selection of the equipment,
pricing and delivery date. The quotation is then delivered to the customer,
and, if the Company is selected as the vendor, final terms are agreed upon and
a contract or purchase order is executed. The Company's engineering and
operations personnel also often provide assistance on complex compressor
applications, field operations issues or equipment modifications.
Competition
The natural gas compression services and fabrication business is highly
competitive. Overall, the Company experiences considerable competition from
companies with significantly greater financial resources and, on a regional
basis, from several smaller companies which compete directly with the Company.
The Company believes it is currently the largest natural gas compression
company in the United States on the basis of aggregate rental horsepower.
Compressor industry participants can achieve significant advantages through
increased size and geographic breadth. As the number of rental units increases
in a rental fleet, the number of sales, engineering, administrative and
maintenance personnel required does not increase proportionately. As a result,
companies such as Hanover with larger rental fleets have relatively lower
operating costs and higher margins due to economies of scale.
One of the significant cost items in the compressor rental business is the
amount of inventory required to service rental units. Each rental company must
maintain a minimum amount of inventory to stay competitive. As the size of the
rental fleet increases, the required amount of inventory does not increase in
the same proportion. The larger rental fleet companies can generate cost of
capital savings through improved purchasing power and vendor support.
7
The Company believes that it competes effectively on the basis of price,
customer service, including the availability of personnel in remote locations,
flexibility in meeting customer needs and quality and reliability of its
compressors and related services.
The Company's compressor fabrication business competes with other
fabricators of compressor units. The compressor fabrication business is
dominated by a few major competitors, several of which also compete with the
Company in the compressor rental business. The Company believes that it is the
largest compressor fabrication company in the United States.
The production equipment business is a highly fragmented business with
approximately eight substantial U.S. competitors. Although sufficient
information is not available to definitively estimate the Company's relative
position in this market, the Company believes that it is among the top three
oil and gas production equipment fabricators in the United States.
Government Regulation
The Company is subject to various federal, state, local and foreign laws and
regulations relating to environment, health and safety, including regulations
regarding air emissions, wastewater and stormwater discharges, as well as waste
handling and disposal. In addition, certain of the Company's customer service
arrangements may require the Company to operate, on behalf of a specific
customer, petroleum storage units such as underground tanks, or pipelines and
other regulated units, all of which may impose additional compliance
obligations. Certain states have or are considering, and the federal government
has recently passed, more stringent air emission controls on off-road engines.
These laws and regulations may affect the costs of the Company's operations. As
with any owner of property, the Company is also subject to clean-up costs and
liability for hazardous materials, asbestos, or any other toxic or hazardous
substance that may exist on or under any of its properties.
The Company believes that it is in substantial compliance with environmental
laws and regulations and that the phasing in of recent non-road engine air
emission controls and other known regulatory requirements at the rate currently
contemplated by such laws and regulations will not have a material adverse
effect on the Company's financial condition, results of operations or cash
flows.
Notwithstanding, the Company may not be in compliance with certain
environmental requirements for recently acquired facilities, in part because of
its rapid growth through acquisitions. With respect to newly-acquired
facilities, it is the Company's practice to investigate environmental
compliance issues and address any issues promptly. The Company cannot be
certain, however, that all such issues are completely resolved in accordance
with applicable environmental regulations prior to the Company taking over
operations, although it is the Company's goal to correct any deficiencies as
quickly as possible.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on persons who are
considered to be responsible for the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the facility or
disposal site or sites where the release occurred and companies that disposed
or arranged for the disposal of the hazardous substances. Under CERCLA, and
similar state laws, such persons may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment, for damages to natural resources, and for the costs of
certain health studies. Furthermore, it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by hazardous substances or other pollutants
released into the environment. The Company is not currently under any order
requiring that the Company undertakes or pays for any cleanup activities, nor
is the Company aware of any current environmental claims by the government or
private parties against the Company demanding remedial costs or alleging that
the Company is liable for such costs. However the Company cannot be certain
that it will not receive any such claims in the future.
8
The Resource Conservation and Recovery Act ("RCRA") and regulations
promulgated thereunder govern the generation, storage, transfer and disposal of
hazardous wastes. The Company must comply with RCRA regulations for any of its
operations that involve the generation, management, or disposal of hazardous
wastes (such as painting activities or the use of solvents). In addition, to
the extent the Company operates underground tanks on behalf of specific
customers, such operations may be regulated under RCRA. The Company believes it
is in substantial compliance with RCRA and is not aware of any current claims
against the Company alleging RCRA violations. The Company cannot be certain,
however, that it will not receive such notices of potential liability in the
future.
Stricter standards in environmental legislation that could affect the
Company may be imposed in the future, such as more stringent air emission
requirements or proposals to make hazardous wastes subject to more stringent
and costly handling, disposal and clean-up requirements. While the Company may
be able to pass on the additional costs of complying with such laws to its
customers, there can be no assurance that attempts to do so will be successful.
Accordingly, new laws or regulations or amendments to existing laws or
regulations might require the Company to undertake significant capital
expenditures and could otherwise have a material adverse effect on the
Company's business, results of operations, cash flows and financial condition.
Executive Officers
The following sets forth, as of March 30, 2001, the name, age and business
experience for the last five years of each of the executive officers of the
Company.
Name Age Position
---- --- --------
Michael A. O'Connor................. 65 Chairman of the Board; Director
Michael J. McGhan................... 46 President and Chief Executive
Officer; Director
William S. Goldberg................. 42 Chief Financial Officer, Treasurer
and Executive Vice President;
Director
Charles D. Erwin.................... 40 Senior Vice President--Sales and
Marketing
Joe C. Bradford..................... 43 Senior Vice President--Worldwide
Operations
Robert O. Pierce.................... 41 Senior Vice President--Operations--
Fabrication
Michael A. O'Connor has served as Chairman of the Board and a director since
January 1992. Mr. O'Connor also serves as an officer and a director of our
subsidiaries.
Michael J. McGhan has served as President and Chief Executive Officer since
October 1991. Mr. McGhan has served as a director since March 1992. Mr. McGhan
also serves as an officer and a director of our subsidiaries.
William S. Goldberg has served as Chief Financial Officer since May 2000.
Mr. Goldberg has served as Executive Vice President and director since May
1991. Mr. Goldberg has been employed by GKH Investments, L.P., a Delaware
limited partnership and GKH Private Limited since 1988 and has served as
Managing Director of both entities since June 1990. GKH Investments, L.P. is
the Company's largest stockholder. Mr. Goldberg also serves as an officer and a
director of certain affiliates of the Company. In addition, Mr. Goldberg is a
director of DVI, Inc.
Charles D. Erwin has served as Senior Vice President--Sales and Marketing
since May 2000. Prior to being named Senior Vice President, Mr. Erwin had
served as a Vice President since October 1990.
Joe C. Bradford has served as Senior Vice President--Worldwide Operations
Development since May 2000. Prior to being named Senior Vice President, Mr.
Bradford had served as a Vice President since March 1993.
9
Robert O. Pierce has served as Senior Vice President--Operations--
Fabrication since May 2000. Prior to being named Senior Vice President, Mr.
Pierce had served as a Vice President since April 1995.
Employees
As of December 31, 2000, the Company had approximately 2,700 employees,
approximately 100 of whom are represented by a labor union. The Company
believes that its relations with its employees are satisfactory.
Item 2. Properties
The Company owns its corporate offices in Houston, Texas, which are housed
in a combination corporate office and compressor fabrication complex, including
a 192,000 square foot plant located on approximately 28 acres. The Company also
owns (i) a 11,700 square foot combination office and maintenance facility
located on 6.5 acres in Yukon, Oklahoma, (ii) a 8,000 square foot combination
office and maintenance facility situated on 6 acres in Pocola, Oklahoma, (iii)
12,000 square feet of maintenance facilities situated on 3.5 acres in Midland,
Texas, (iv) a 5,000 square foot sales and service facility situated on one acre
located in Corpus Christi, Texas, (v) a 345,000 square foot manufacturing
facility in Davis, Oklahoma, (vi) a 16,750 square foot facility situated on 9.2
acres in Kilgore, Texas, (vii) a 210,000 square foot production equipment
manufacturing facility located on 82 acres in Columbus, Texas (viii) a 35,000
square foot combination of office, warehouse and maintenance facility situated
on 17 acres in Broussard, Louisiana, (ix) a 19,000 square foot office and
maintenance facility located on 15.3 acres in Farmington, New Mexico, (x) a
134,570 square foot facility situated on 13.7 acres in Broken Arrow, Oklahoma,
(xi) a 40,000 square foot facility located on 30 acres in Tulsa, Oklahoma,
(xii) a 33,700 square foot office and maintenance facility located on 2.2 acres
in Aldridge, Walsall, United Kingdom, (xiii) a 78,000 square foot combination
office and maintenance facility located on 15 acres in Alberta, Canada. The
Company also leases a maintenance facility of 19,000 square feet in Victoria,
Texas under a five year lease. In addition, the Company has a three year lease
on a 190,000 square foot fabrication facility in Houston, Texas with an option
to purchase the facility at the end of the lease.
The Company's executive offices are located at 12001 North Houston Rosslyn,
Houston, Texas 77086 and its telephone number is (281) 447-8787.
Item 3. Legal Proceedings
The Company is not currently involved in any material litigation or
proceeding and is not aware of any such litigation or proceeding threatened
against it.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of its fiscal year ended December 31, 2000.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock began trading on the New York Stock Exchange on July 1,
1997 under the symbol "HC." The following table sets forth, for the periods
indicated, the high and low intraday sales price for the Common Stock, for the
periods indicated.
High Low
------- -------
1999
First Quarter............................................. $14.000 $ 9.625
Second Quarter............................................ $17.781 $13.063
Third Quarter............................................. $19.063 $15.688
Fourth Quarter............................................ $19.188 $14.031
2000
First Quarter............................................. $28.438 $16.906
Second Quarter............................................ $38.000 $22.719
Third Quarter............................................. $40.688 $25.250
Fourth Quarter............................................ $46.063 $28.938
As of March 30, 2001, there were 69,022,512 shares of Common Stock
outstanding, held by approximately 321 stockholders of record.
The Company has not paid any cash dividends on its Common Stock since its
formation and does not anticipate paying such dividends in the foreseeable
future. The Board of Directors anticipates that all cash flow generated from
operations in the foreseeable future will be retained and used to develop and
expand the Company's business. The Company's $200 million credit facility with
The Chase Manhattan Bank, as agent (the "Bank Credit Agreement") limits the
amount of dividends payable by the Company (without the lender's prior
approval) on its Common Stock to no more than 25% of the Company's net income
for the period from January 1, 1998 until December 15, 2002. Any future
determinations to pay cash dividends on the Common Stock will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations and financial condition, credit and loan
agreements in effect at that time and other factors deemed relevant by the
Board of Directors.
11
Set forth below is certain information with respect to all securities of the
Company sold by the Company in 2000 which were not registered under the
Securities Act of 1933, as amended. Share numbers in the table below have been
adjusted to reflect the Company's two-for-one split of its Common Stock
effected in June 2000.
Underwriting
Title and Discounts
Amount of Aggregate and Exemption
Date of Sale Securities Purchasers Offering Price Commissions Claimed
------------ -------------- ---------------------------- -------------- ------------ ---------
May 1, 2000 896,250 shares Janus Aspen Series on behalf $26,887,500 None Sec. 4(2)
of of its series
Common Stock Janus Aspen Aggressive
Growth Fund
May 1, 2000 1,103,750 Janus Investment Fund on $33,112,500 None Sec. 4(2)
shares of behalf of its series Janus
Common Stock Enterprise Fund
June 5, 2000 2,303,294 APS Growth, L.P., Maloney Issued in None Sec. 4(2)
shares of Holding, L.P., Massachusetts connection
Common Stock Mutual Life Insurance with the
Company, Brad Goebel, David Company's
R. MacKenzie, David Cook, acquisition of
Gary Palmer, Greg Churnik, Applied
Merlin Findlay, Peter Process
Ferner, Scott MacFarlane, Solutions,
Nick Kolebaba, John H. Inc.
Nodwell, Craig Wentworth,
Martin A. Lambert, Victoria
L. McClenny, Rod Stewart,
Gordon Hendley, Heart Boen,
Larry Brannan, Glenn
Russell, James S. Atkins,
Judy Ann Lofton, Mike
McCarthy, Kenny Lee Smith,
Wesley W. Cowell, William
James Row, Robert Williams,
Brian Cooper, Charles Dean
Guthrie, Dean Poohachow,
Jerry Leonard, Lester
Phillips, Carolyn Smith,
Hamilton Robinson, Jr.,
George Jackson Lee, Robert
Webb, William Havenstrite,
Jr., Gerry Stach, Stephen L.
Stone, Danny R. Crawford,
Robert Smith, Vera I. Webb
August 31, 2000 2,919,681 Ingersoll-Rand Company Issued in None Sec. 4(2)
shares of connection
Common Stock with the
Company's
acquisition of
the
compressor
services
division of
Dresser-
Rand Company,
a
business unit
of
Ingersoll-Rand
Company
12
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA (HISTORICAL)
(Dollars and shares in thousands, except per share data)
The following table presents certain selected financial data for the Company
for each of the five years in the period ended December 31, 2000. The selected
financial data have been derived from the audited consolidated financial
statements of the Company. The following information should be read together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements of the Company.
Year Ended December 31,
-----------------------------------------------
2000 1999 1998 1997 1996
----------- -------- -------- -------- -------
Restated(1)
Income Statement Data:
Revenues:
Rentals...................... $254,515 $192,655 $147,609 $100,685 $72,897
Parts, service and used
equipment................... 132,203 42,518 29,538 10,808 8,269
Compressor fabrication....... 90,270 52,531 67,453 49,764 28,764
Production and processing
equipment fabrication....... 79,121 28,037 37,466 37,052 26,903
Gain on sale of other
assets...................... 1,888 4,062 1,278 189 74
Gain on change in interest
in non-consolidated
affiliate................... 864
Other........................ 7,220 3,417 3,007 895 637
-------- -------- -------- -------- -------
Total revenues............. 566,081 323,220 286,351 199,393 137,544
-------- -------- -------- -------- -------
Expenses:
Rentals...................... 87,992 64,949 49,386 35,113 26,012
Parts, service and used
equipment................... 89,128 27,916 21,735 6,955 6,321
Compressor fabrication....... 76,754 43,663 58,144 41,584 24,657
Production and processing
equipment fabrication....... 62,684 20,833 25,781 26,375 19,574
Selling, general and
administrative.............. 54,632 33,782 26,626 21,514 16,711
Depreciation and
amortization................ 52,882 37,337 37,154 28,439 20,722
Lease expense................ 45,484 22,090 6,173
Interest expense............. 8,685 8,786 11,716 10,728 6,594
Distributions on mandatorily
redeemable convertible
preferred
Securities.................. 6,369 278
-------- -------- -------- -------- -------
Total expenses............. 484,610 259,634 236,715 170,708 120,591
-------- -------- -------- -------- -------
Income before income taxes.... 81,471 63,586 49,636 28,685 16,953
Provision for income taxes.... 30,307 23,145 19,259 11,043 6,730
-------- -------- -------- -------- -------
Net income.................... 51,164 40,441 30,377 17,642 10,223
Other comprehensive (loss)
income, net of tax:
Foreign currency translation
adjustment.................. (146) (463) 152
-------- -------- -------- -------- -------
Comprehensive income.......... $ 51,018 $ 39,978 $ 30,529 $ 17,642 $10,223
======== ======== ======== ======== =======
Net income available to common
stockholders:
Net Income................... $ 51,164 $ 40,441 $ 30,377 $ 17,642 $10,223
Dividends on Series A and
Series B preferred stock.... (1,773)
Series A preferred stock
exchange.................... (3,794)
Series B preferred stock
conversion.................. (1,400)
-------- -------- -------- -------- -------
Net income available to common
stockholders................. $ 51,164 $ 40,441 $ 30,377 $ 17,642 $ 3,256
======== ======== ======== ======== =======
Weighted average common and
common equivalent shares:
Basic(2)..................... 61,831 57,048 56,936 51,246 40,996
-------- -------- -------- -------- -------
Diluted(2)................... 66,366 61,054 60,182 54,690 44,046
-------- -------- -------- -------- -------
Earnings per common share:
Basic(2)..................... $ 0.83 $ 0.71 $ 0.53 $ 0.34 $ 0.08
======== ======== ======== ======== =======
Diluted(2)(3)................ $ 0.77 $ 0.66 $ 0.50 $ 0.32 $ 0.07
======== ======== ======== ======== =======
13
Year Ended December 31,
---------------------------------------------------
2000 1999 1998 1997 1996
----------- -------- -------- -------- --------
Restated(1)
Other Data:
EBITDA(4)............... $ 194,891 $132,077 $104,679 $ 67,852 $ 44,269
Cashflows provided by
(used in):
Operating activities.... $ 31,658 $ 68,222 $ 31,147 $ 32,219 $ 20,276
Investing activities.... (69,393) (92,114) (14,699) (164,490) (87,683)
Financing activities.... 77,589 18,218 (9,328) 129,510 71,740
Balance Sheet Data (end
of period):
Working capital......... $ 285,443 $107,966 $113,264 $ 58,027 $ 41,513
Net property, plant and
equipment.............. 573,596 497,465 392,498 394,070 266,406
Total assets............ 1,251,756 756,510 614,590 506,452 341,387
Long-term debt.......... 110,935 69,681 156,943 158,838 122,756
Mandatorily redeemable
convertible preferred
securities............. 86,250 86,250
Common stockholders'
equity................. 632,458 367,914 315,470 287,028 176,113
--------
(1) In conjunction with a review of the Company's joint ventures and other
transactions conducted by the Board of Directors in early 2002, the Company
determined restatement was appropriate. The net effect of this restatement
for the year ended December 31, 2000 was as follows: (i) a decrease in
revenues of $37.7 million, from $603.8 million to $566.1 million; (ii) a
decrease in income before taxes of $12.0 million, from $93.5 million to
$81.5 million; (iii) a decrease in net income of $7.5 million, from $58.7
million to $51.2 million; and (iv) a decrease in earnings per common share
of $0.12 basic and $0.11 diluted. See Note 19 of the Notes to Consolidated
Financial Statements.
(2) In June 2000, the Company completed a 2-for-1 stock split effected in the
form of a 100% stock dividend. All weighted average and common equivalent
shares and earnings per common share information have been restated for all
periods presented to reflect this stock split.
(3) Diluted earnings per share in 1996 was $.23 per share before the effects of
charging retained earnings for $1.8 million relating to dividends on
redeemable preferred stock and one-time charges to retained earnings for
(i) $3.8 million related to the exchange of all Series A preferred stock
for subordinated notes and (ii) $1.4 million related to the conversion of
all Series B preferred stock to Common Stock.
(4) EBITDA consists of the sum of consolidated net income before interest
expense, lease expense, distributions on mandatorily redeemable convertible
preferred securities, income tax, and depreciation and amortization. The
Company believes that EBITDA is a meaningful measure of its operating
performance and is also used to measure the Company's ability to meet debt
service requirements. EBITDA should not be considered as an alternative
performance measure prescribed by generally accepted accounting principles.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
General
The Company is a leading provider of a broad array of natural gas
compression, gas handling and related services in the United States and select
international markets. Founded in 1990 and publicly held since 1997, the
Company operates the largest compressor rental fleet, in terms of horsepower,
in the gas compression industry and provides its services on a rental, contract
compression, maintenance and acquisition leaseback
14
basis. In conjunction with the Company's maintenance business, the Company has
developed its parts and service business to provide solutions to customers that
own their own compression equipment but want to outsource their operations. The
Company's compression services are complemented by its compressor and oil and
gas production equipment fabrication operations and gas processing and
treating, gas measurement and power generation services, which broaden the
Company's customer relationships both domestically and internationally. The
Company's products and services are essential to the production, gathering,
processing, transportation and storage of natural gas and are provided
primarily to independent and major producers and distributors of natural gas.
In September 2000, the Company acquired the compression services division of
Dresser-Rand Company for $177 million in cash and common stock, subject to
certain post-closing adjustments pursuant to the acquisition agreement which to
date have resulted in an increase in the purchase price to approximately $194
million due to increases in net assets acquired. In July 2000, the Company
acquired PAMCO Services International for approximately $58 million in cash and
notes. In June 2000, the Company acquired Applied Process Solutions, Inc. for
2,303,294 newly issued shares of the Company's common stock. These acquisitions
were included in the results of operations from their respective acquisition
dates. In addition, the Company completed a two-for-one stock split effected in
the form of a 100% stock dividend in June 2000. Accordingly, common stock,
additional paid-in capital and all earnings per share information have been
restated for all periods presented.
The following table summarizes revenues, expenses and gross profit
percentages for each of the Company's business segments (Dollars in millions):
Year ended December
31,
-----------------------
Restated
2000 1999 1998
-------- ------ ------
Revenues:
Rentals--Domestic.................................... $173.2 $136.5 $107.4
Rentals--International............................... 81.3 56.2 40.2
Parts, service and used equipment.................... 132.2 42.5 29.5
Compressor fabrication............................... 90.3 52.5 67.5
Production and processing equipment fabrication...... 79.1 28.0 37.5
Other................................................ 10.0 7.5 4.3
------ ------ ------
Total.............................................. $566.1 $323.2 $286.4
====== ====== ======
Expenses:
Rentals--Domestic.................................... $ 60.3 $ 46.2 $ 36.6
Rentals--International............................... 27.7 18.8 12.8
Parts, service and used equipment.................... 89.1 27.9 21.7
Compressor fabrication............................... 76.8 43.7 58.1
Production and processing equipment fabrication...... 62.7 20.8 25.8
------ ------ ------
Total.............................................. $316.6 $157.4 $155.0
====== ====== ======
Gross profit percentage:
Rentals--Domestic.................................... 65.2% 66.1% 65.9%
Rentals--International............................... 66.0% 66.6% 68.2%
Parts, service and used equipment.................... 32.6% 34.3% 26.4%
Compressor fabrication............................... 15.0% 16.8% 13.8%
Production and processing equipment fabrication...... 20.8% 25.7% 31.2%
15
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues
The following discussion has been updated to reflect the restated results of
operations, see Note 19 in "Notes to Consolidated Financial Statements" for
details regarding the restatement.
The Company's total revenues increased by $242.9 million, or 75%, to $566.1
million during 2000 from $323.2 million during 1999. The increase resulted from
growth of the Company's natural gas compressor rental fleet and acquisitions
completed during 2000.
Revenues from rentals increased by $61.8 million, or 32%, to $254.5 million
during 2000 from $192.7 million during 1999. Domestic revenues from rentals
increased by $36.7 million, or 27%, to $173.2 million during 2000 from $136.5
million during 1999. International revenues from rentals increased by $25.1
million, or 45%, to $81.3 million during 2000 from $56.2 million during 1999.
At December 31, 2000 the compressor rental fleet consisted of approximately
2,151,000 horsepower, a 48% increase over the 1,458,000 horsepower in the
rental fleet at December 31, 1999. Domestically, the rental fleet increased by
560,000 horsepower, or 47%, during 2000 and internationally by 133,000
horsepower, or 48%. The increase in both domestic and international rental
revenues resulted primarily from expansion of the Company's rental fleet.
Revenues from parts, service and used equipment increased by $89.7 million,
or 211% to $132.2 million during 2000 from $42.5 million during 1999. This
increase is due primarily to increased marketing focus and partially from
expansion of business activities through recent acquisitions. Revenues from
compressor fabrication increased by $37.8 million, or 72%, to $90.3 million
during 2000 from $52.5 million during 1999. An aggregate of 166,000 horsepower
was sold during 2000. In addition, 168,000 horsepower was fabricated and placed
in the rental fleet during 2000. The increase in horsepower produced during
2000 resulted from an increased demand for compression equipment due to higher
natural gas prices.
Revenues from production and processing equipment fabrication increased by
$51.1 million, or 182%, to $79.1 million during 2000 from $28.0 million during
1999. The increase in revenues from production equipment fabrication is due
primarily to the acquisition of Applied Process Solutions Inc. in June 2000.
The Company recognized gains on sales of other assets of $1.9 million during
2000 and $4.1 million during 1999. In 2000, the Company sold a 25% undivided
interest in a power generation plant resulting in the recognition of a $1.3
million gain. Other revenues increased by $4.7 million, or 137% to $8.1 million
during 2000 from $3.4 million during 1999. Equity in earnings in subsidiaries
increased by $2.3 million during 2000 to $3.5 million from $1.2 million during
1999. This increase was primarily due to our investment in Hanover Measurement
Services Company, LP which was formed in September 1999. In addition, during
2000 the Company recorded a change in interest gain of $0.9 million resulting
from an unconsolidated subsidiary stock offering to third parties.
Expenses
Operating expenses of the rentals segments increased by $23.0 million, or
35% to $88.0 million during 2000 from $65.0 million during 1999. The increase
resulted primarily from the corresponding 32% increase in revenues from rentals
over the corresponding period in 1999. The gross profit percentage from rentals
was 65% during 2000 and 66% during 1999. Operating expenses of parts, service
and used equipment increased $61.2 million, or 219% to $89.1 million during
2000 from $27.9 million during 1999, which relates to the 211% increase in
parts and service revenue. The gross profit percentage from parts, service and
used equipment was 33% during 2000 and 34% during 1999. Operating expenses of
compressor fabrication increased by $33.0 million, or 76% to $76.8 million from
$43.7 million during 1999. The gross profit margin on compression fabrication
was 15% during 2000 and 17% during 1999. The decrease in gross profit margin
for compression fabrication was attributable to the acquisition of the
compression services division of Dresser-Rand Company. Production and
processing equipment fabrication operating expenses increased by $41.9 million,
or 201%, during 2000 to $62.7 million from $20.8 million during 1999. The gross
profit margin attributable to production and processing equipment fabrication
decreased to 21% during 2000, from 26% during 1999. The decrease in
16
gross profit margin for production and processing equipment fabrication was
attributable to the acquisition of Applied Process Solutions, Inc. in June
2000, which has lower gross margins than the Company has historically
experienced.
Selling, general and administrative expenses increased by $20.9 million, or
62% to $54.6 million during 2000. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
acquisitions in 2000 and the increase in operating activity in the Company's
rentals business segments as described above.
Depreciation and amortization expense increased by $15.5 million, or 42%
during 2000 to $52.9 million. The increase in depreciation from the additions
to the rental fleet was offset by a decrease in depreciation expense as a
result of the equipment leases entered into in June 1999 and during 2000.
Interest expense decreased by $.1 million, or 1% during 2000 to $8.7
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment leases which was used to reduce indebtedness under
the Company's credit facility and the capitalization of interest expense on
assets that are under construction.
The Company incurred compression equipment lease expense of $45.5 million
during 2000 and $22.1 million during 1999. The increase is due to having a full
year of lease expense on the equipment lease entered into in June 1999 and the
new equipment leases entered into during 2000. As a result of the equipment
leases, the Company expects to incur annual operating leasing expense of
approximately $60 million.
Income Taxes
The provision for income taxes increased by $7.2 million, or 31%, to $30.3
million during 2000 from $23.1 million during 1999. The increase resulted
primarily from the corresponding increase in income before taxes. The Company's
effective income tax rate was approximately 37.2% during 2000 and 36.4% during
1999. The increase in the effective rate was primarily the result of increased
income in foreign tax jurisdictions.
Net Income and Earnings Per Share
Net income increased $10.8 million, or 27%, to $51.2 million for 2000 from
$40.4 million in 1999 for the reasons discussed above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
The Company's total revenues increased by $36.8 million, or 13%, to $323.2
million during 1999 from $286.4 million during 1998. The increase resulted from
growth of the Company's natural gas compressor rental fleet but was offset by
decreases in compressor fabrication and production equipment fabrication
revenues.
Revenues from rentals increased by $45.1 million, or 31%, to $192.7 million
during 1999 from $147.6 million during 1998. Domestic revenues from rentals
increased by $29.1 million, or 27%, to $136.5 million during 1999 from $107.4
million during 1998. International revenues from rentals increased by $16.0
million, or 40%, to $56.2 million during 1999 from $40.2 million during 1998.
At December 31, 1999 the compressor rental fleet consisted of approximately
1,458,000 horsepower, a 37% increase over the 1,067,000 horsepower in the
rental fleet at December 31, 1998. Domestically, the rental fleet increased by
289,000 horsepower, or 32%, during 1999 and internationally by 103,000
horsepower, or 59%. The increase in both domestic and international rental
revenues resulted primarily from expansion of the Company's rental fleet.
Revenues from parts, service and used equipment increased by $13.0 million,
or 44% to $42.5 million during 1999 from $29.5 million during 1998. Revenues
from compressor fabrication and sale of compressor equipment to third parties
decreased by $15.0 million, or 22%, to $52.5 million during 1999 from $67.5
million during 1998. An aggregate of 156,000 horsepower was sold during 1999.
In addition, 164,000 horsepower was fabricated and placed in the rental fleet
during 1999. The Company believes the revenue decrease during 1999 was due in
part to a project where a customer supplied its own engines, which are
typically provided by the
17
Company, and in part due to lower energy prices in 1999, which reduced the
demand for compressors thereby adversely impacting sales prices.
Revenues from fabrication and sale of production and processing equipment
fabrication decreased by $9.5 million, or 25%, to $28.0 million during 1999
from $37.5 million during 1998 primarily due to the decline in well completions
resulting from lower energy prices during the first half of 1999.
The Company recognized gains on sales of other assets of $4.1 million during
1999 compared to $1.3 million during the 1998.
Expenses
Operating expenses of the rentals segments increased by $15.6 million, or
32% to $65.0 million during 1999 from $49.4 million during 1998. The increase
resulted primarily from the corresponding 31% increase in revenues from rentals
over the corresponding period in 1998. The gross profit percentage from rentals
was 66% during 1999 and 67% during 1998. Operating expenses of parts, service
and used equipment increased $6.2 million, or 28% to $27.9 million during 1999
from $21.7 million during 1998, which relates to the 44% increase in parts,
service and used equipment revenue. The gross profit percentage from parts,
service and used equipment increased to 35% during 1999 from 26% in 1998.
Operating expenses of compressor fabrication decreased by $14.4 million, or 25%
to $43.7 million from $58.1 million during 1998. The gross profit margin on
compression fabrication increased to 17% during 1999, from 14% during 1998.
Production and processing equipment fabrication operating expenses decreased by
$5.0 million, or 19%, during 1999 to $20.8 million from $25.8 million during
1998. The decrease in operating expenses is reflective of the corresponding
change in production and processing equipment fabrication revenues during 1999.
The gross profit margin attributable to production and processing equipment
fabrication decreased to 26% during 1999, from 31% during 1998.
Selling, general and administrative expenses increased by $7.2 million, or
27% to $33.8 million during 1999. The increase is attributable to increased
personnel and other administrative and selling expenses associated with the
increase in operating activity in the Company's rentals business segments as
described above.
Depreciation and amortization expense increased by $0.2 million, or 1%
during 1999 to $37.3 million. The increase in depreciation from the additions
to the rental fleet was offset by a decrease in depreciation expense as a
result of the equipment leases entered into in July 1998 and June 1999.
Interest expense decreased by $2.9 million, or 25% during 1999 to $8.8
million. The decrease in interest expense was due in part to utilization of
proceeds from the equipment lease, which was used to reduce indebtedness under
the Bank Credit Agreement and the capitalization of interest expense on assets
that are under construction.
The Company incurred compression equipment lease expense of $22.1 million
during 1999 and $6.2 million during 1998. As a result of the equipment leases,
the Company expects to incur annual operating leasing expense of approximately
$30 million.
Income Taxes
The provision for income taxes increased by $3.8 million, or 20%, to $23.1
million during 1999 from $19.3 million during 1998. The increase resulted
primarily from the corresponding increase in income before taxes. The Company's
effective income tax rate was approximately 36.4% during 1999 and 38.8% during
1998. The decrease in average effective income tax rates is due to expected
benefits from a foreign sales corporation established in 1998.
Net Income and Earnings Per Share
Net income increased $10.0 million, or 33%, to $40.4 million for 1999 from
$30.4 million in 1998 for the reasons discussed above.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance amounted to $45.5 million at December 31, 2000
compared to $5.8 million at December 31, 1999. Primary sources of cash during
2000 were proceeds of $372.6 million from the equipment leases, approximately
$40.4 million of borrowings under the Company's credit facility and proceeds of
$59.4 million from a private placement of 2 million newly issued shares of
restricted common stock to an institutional investor. Principal uses of cash
during the year ended December 31, 2000 were capital expenditures and business
acquisitions of $476.2 million.
Working capital increased to $285.4 million at December 31, 2000 from $108.0
million at December 31, 1999, primarily as a result of increases in accounts
receivable, inventories and costs in excess of billings. The increase in these
balances is due to an increased level of activity in the Company's lines of
business over 1999 and the recent acquisitions. These increases were partially
offset by an increase in current liabilities.
The amount invested in property, plant and equipment including business
acquisitions during 2000 was $482.6 million which resulted in the addition of
approximately 693,000 horsepower to the rental fleet. At December 31, 2000, the
rental fleet consisted of 1,741,000 horsepower domestically and 410,000 in the
international rental fleet. Current plans are to spend approximately $318.3
million for capital expenditures during 2001, exclusive of any major
acquisitions. In March 2001, the Company completed its purchase of OEC
Compression Corporation for approximately 1,141,000 shares of the Company's
common stock and the assumption of approximately $61.9 million in debt.
Historically, the Company has funded capital expenditures with a combination
of internally generated cash flow, borrowings under the revolving credit
facility, equipment lease transactions and raising additional equity. As of
December 31, 2000, the Company had approximately $80 million of credit capacity
remaining on its $200 million bank credit agreement (7.5% rate at December 31,
2000). In March 2001, the Company received net proceeds of approximately $186
million before expenses from the sale of $192 million aggregate principal
amount of the Company's seven-year convertible senior notes. The notes bear
interest at 4.75% and are convertible into shares of the Company's common stock
at a conversion price of approximately $43.94 per share. Concurrent with the
convertible senior notes, the Company issued and sold 2.5 million shares of its
common stock with net proceeds to the Company of approximately $84 million
before expenses.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, requires that, upon adoption, all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged item pending
recognition in earnings. The Company adopted SFAS 133 beginning January 1,
2001, and the initial adoption of SFAS 133 did not have a material effect on
the Company's results of operations, cash flows or financial position. However,
the impact on our results of operations in the first quarter of 2001 and
subsequent periods could be material due to fluctuations in the fair value of
an option held by the counterparty to our interest rate swaps which will be
recorded in our results of operations until this option is exercised or expires
in July 2001.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in
Financial Statements. SAB No. 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in the
financial statements. The statement was effective for the Company's fourth
quarter of 2000. The Company was in compliance with the provisions of SAB No.
101. Therefore, implementation of SAB No. 101 did not have an impact on the
financial statements.
19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate and foreign currency risk. The
Company periodically enters into interest rate swaps to manage its exposure to
fluctuations in interest rates. At December 31, 2000 and 1999, the fair market
value of these interest rate swaps and the options to extend their maturity is
approximately $0.2 million and $2.9 million, respectively. At December 31,
2000, the Company is exposed to variable rental rates on the equipment leases
it entered into in June 1999 and March, August and October 2000. Assuming a
hypothetical 10% increase in interest rates from those in effect at year end,
the increase in annual leasing expense on these equipment leases would be
approximately $4.4 million. The Company does not use derivative financial
instruments to mitigate foreign currency risk.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary information specified by this
Item are presented following Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information included or to be included in the Company's definitive proxy
statement for its 2001 Annual Meeting of Stockholders under the captions
"Nominees for Election as Directors," and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated by reference herein.
Item 11. Executive Compensation.
The information included or to be included under the caption "Executive
Compensation" in the Company's definitive proxy statement for its 2001 Annual
Meeting of Stockholders is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information included or to be included under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive proxy statement for its 2001 Annual Meeting of Stockholders is
incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions.
The information included or to be included under the caption "Certain
Relationships and Related Transactions" in the Company's definitive proxy
statement for its 2001 Annual Meeting of Stockholders is incorporated by
reference herein.
20
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of this report.
1. Financial Statements. The following financial statements are filed as
a part of this report.
Report of Independent Accountants................................... F-1
Consolidated Balance Sheet.......................................... F-2
Consolidated Statement of Income and Comprehensive Income........... F-3
Consolidated Statement of Cash Flows................................ F-4, F-5
Consolidated Statement of Stockholders' Equity...................... F-6
Notes to Consolidated Financial Statements.......................... F-7
Selected Quarterly Financial Data (unaudited)....................... F-28
2. Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts...................... S-1
2. Exhibits.
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of the Hanover Compressor Holding Co.
(14) [3.1]
3.2 Certificate of Amendment of Certificate of Incorporation of Hanover
Compressor Holding Co. dated December 8, 1999 (14) [3.2]
3.3 Certificate of Amendment of Certificate of Incorporation of Hanover
Compressor Holding Co. dated July 11, 2000 (14) [3.3]
3.4 By-laws of Hanover Compressor Company (9) [3.3]
4.1 Third Amended and Restated Registration Rights Agreement, dated as of
December 5, 1995, among the Company, GKH Partners, L.P., GKH
Investments, L.P., Astra Resources, Inc. and other stockholders of the
Company party thereto (1) [4.1]
4.10 Form of Warrant Agreement (1) [4.10]
4.11 Specimen Stock Certificate (1) [4.11]
4.12 Form of Second Amended and Restated Stockholders Agreement of Hanover
Compressor Company dated as of June, 1997 (1) [4.12]
4.13 Form of Amended and Restated Stockholders Agreement (JEDI) dated as of
May, 1997 (1) [4.13]
4.14 Form of Amended and Restated Stockholders Agreement (Westar Capital,
Inc.) dated as of May, 1997 (1) [4.14]
4.15 Form of Amended and Restated Stockholders Agreement (HEHC) dated as of
May, 1997 (1) [4.15]
10.1 Credit Agreement, dated as of December 15, 1997, by and between the
Company, The Chase Manhattan Bank, a New York banking corporation as
Administrative Agent and several banks and other financial
institutions that are parties thereto (2) [10.30]
10.2 Subsidiaries' Guarantee, dated as of December 15, 1997, by certain of
the Company's subsidiaries in favor of The Chase Manhattan Bank, as
agent (2) [10.31]
21
Exhibit
Number Description
------- -----------
10.3 Management Fee Letter, dated November 14, 1995 between GKH Partners,
L.P. and the Company (1) [10.3]
10.4 Hanover Compressor Company Senior Executive Stock Option Plan (1)
[10.4]
10.5 1993 Hanover Compressor Company Management Stock Option Plan (1)
[10.5]
10.6 Hanover Compressor Company Incentive Option Plan (1) [10.6]
10.7 Amendment and Restatement of Hanover Compressor Company Incentive
Option Plan (1) [10.7]
10.8 Hanover Compressor Company 1995 Employee Stock Option Plan (1) [10.8]
10.9 Hanover Compressor Company 1995 Management Stock Option Plan (1)
[10.9]
10.10 Hanover Compressor Company 1996 Employee Stock Option Plan (1) [10.10]
10.11 OEM Sales and Purchase Agreement, between Hanover Compressor Company
and the Waukesha Engine Division of Dresser Industries, Inc. (1)
[10.11]
10.12 Distribution Agreement, dated February 23, 1995, between Ariel
Corporation and Maintech Enterprises, Inc. (1) [10.12]
10.13 Exclusive Distribution Agreement, dated as of February 23, 1995 by and
between Hanover/Smith, Inc. and Uniglam Resources, Ltd. (1) [10.13]
10.14 Lease Agreement, dated December 4, 1990, between Hanover Compressor
Company and Ricardo J. Guerra and Luis J. Guerra as amended (1)
[10.15]
10.15 Indemnification Agreement, dated as of December 5, 1995, between
Hanover Compressor Company and Western Resources (formerly Astra
Resources, Inc.) (1) [10.18]
10.16 Put Agreement, dated December 5th, 1995, by and between Western
Resources, Inc. (formerly Astra Resources, Inc.) an Hanover Compressor
Company and Hanover Acquisition Corporation (formerly Astra Resources
Compression, Inc.) (1) [10.19]
10.17 Exchange and Subordinated Loan Agreement dated as of December 23,
1996, among the Company and GKH Partners, L.P., GK December 23, 1996,
among the Company and GKH Partners, L.P., GK Investments, L.P., IPP95,
L.P., Hanna Investment Group, Ott Candies, Inc., Phyllis S. Hojel, Ted
Collins, Jr. and L.O. Ward (1) [10.20]
10.18 1997 Stock Option Plan, as amended (1) [10.23]
10.19 1997 Stock Purchase Plan (1) [10.24]
10.20 Exchange Agreement by and between Hanover Compressor Company and JEDI,
dated December 23, 1996 (1) [10.27]
10.21 Lease dated as of July 20, 1998 between Hanover Equipment Trust 1998A
(the "Trust") and the Company. (3) [10.1]
10.22 Guarantee dated as of July 22, 1998 and made by the Company,
Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company.
(3) [10.2]
10.23 Lessee's and Guarantor's Consent dated as of July 20, 1998 made by the
Company, Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land
Company. (3) [10.3]
10.24 Participation Agreement dated as of July 22, 1998 among the Company,
the Trust, The Chase Manhattan Bank, as agent, Societe General &
Financial Corporation, and Wilmington Trust Company. (3) [10.4]
10.25 Security Agreement dated as of July 22, 1998 made by the Trust in
favor of The Chase Manhattan Bank, as agent, with the Company joining
by Joinder of Lessee. (3) [10.5]
10.26 Lease Supplement No. 1 dated as of July 22, 1998 between the Trust and
the Company. (3) [10.6] and various banks (9) [10.45]
22
Exhibit
Number Description
------- -----------
10.27 1998 Stock Option Plan (4) [10.7]
10.28 December 10, 1998 Stock Option Plan (5)
10.29 1999 Stock Option Plan (5)
10.30 1998 Amendments to Credit Agreement, dated as of December 15, 1997,
with the Chase Manhattan Bank, a New York banking corporation as
Administrative Agent and several banks and other financial
institutions that are parties thereto (7) [10.35]
10.31 Lease dated as of June 15, 1999 between Hanover Equipment Trust 1999
and the Company (8) [10.36]
10.32 Guarantee dated as of June 15, 1999 and made by the Company,
Hanover/Smith, Inc., Hanover Maintech, Inc. and Hanover Land Company
(8) [10.37]
10.33 Participation Agreement dated as of June 15, 1999 among the Company,
the Trust, Societe Generale Financial Corporation and FTBC Leasing
Corp., The Chase Manhattan Bank, as agent, and Wilmington Trust
Company. (8) [10.38]
10.34 Security Agreement dated as of June 15, 1999 made by the Trust in
favor The Chase Manhattan Bank, as agent. (8) [10.39]
10.35 Lease supplement No. 1 dated June 15, 1999 between the Trust and the
Company. (8) [10.40]
10.36 Lessee's and Guarantor's Consent dated as of June 15, 1999 made by the
Company, Hanover/Smith, Inc. Hanover Maintech, Inc. and Hanover Land
Company. (8) [10.41]
10.37 Amended and Restated Declaration of Trust of Hanover Compressor
Capital Trust, dated as of December 15, 1999, among Hanover Compressor
Company, as sponsor, Wilmington Trust Company, as property trustee,
and Richard S. Meller, William S. Goldberg and Curtis A. Bedrich, as
administrative trustees. (6) [4.5]
10.38 Indenture for the Convertible Junior Subordinated Indentures due 2029,
dated as of December 15, 1999 among Hanover Compressor Company, as
issuer, and Wilmington Trust Company, as trustee. (6) [4.6]
10.39 Form of Hanover Compressor Capital Trust 7 1/4% Convertible Preferred
Securities. (6) [4.8]
10.40 Form of Hanover Compressor Company Convertible Subordinated Junior
Debentures due 2029. (6) [4.9]
10.41 Preferred Securities Guarantee, dated as of December 15, 1999, between
Hanover Compressor Company, as guarantor, and Wilmington Trust
Company, as guarantee trustee. (6) [4.10]
10.42 Common Securities Guarantee dated as of December 15, 1999, by Hanover
Compressor Company, as guarantor (6) [4.11]
10.43 Lease dated as of March 13, 2000 between Hanover Equipment Trust 2000A
and the Hanover Compression Inc. (9) [10.43]
10.44 Guarantee dated as of March 13, 2000 and made by the Company, Hanover
Compression Inc. and certain of their Subsidiaries (9) [10.44]
10.45 Participation Agreement dated as of March 13, 2000 among the Company,
the Hanover Equipment Trust 2000A and various banks (9) [10.45]
10.46 Security Agreement dated as of March 13, 2000 made by the Trust in
favor The Chase Manhattan Bank, as agent. (9) [10.46]
10.47 Assignment of leases, rents and Guarantee from Hanover Equipment Trust
2000A to The Chase Manhattan Bank dated as of March 13, 2000. (9)
[10.47]
23
Exhibit
Number Description
------- -----------
10.48 Agreement and Plan of Merger by and among Hanover Compressor Company,
APSI Acquisition Corporation and Applied Process Solutions, Inc. dated
as of May 3, 2000. (10)[10.48]
10.49 Amendment to Agreement and Plan of Merger by and among Hanover
Compressor Company, APSI Acquisition Corporation and Applied Process
Solutions, Inc. dated as of May 31, 2000. (10)[10.49]
10.50 Amendment No. 2 dated as of October 24, 2000, to Agreement and Plan of
Merger by and among Hanover Compressor Company, APSI Acquisition
Corporation and Applied Process Solutions, Inc. (12)[10.50]
10.51 Purchase Agreement dated as of July 11, 2000 among Hanover Compressor
Company, Hanover Compression Inc., Dresser-Rand Company and Ingersoll-
Rand Company (11) [99.2]
10.52 Agreement and Plan of Merger dated as of July 13, 2000 by and among
Hanover Compressor Company, Caddo Acquisition Corporation and OEC
Compression Corporation. (12)[10.51]
10.53 Voting and Disposition Agreement dated as of July 13, 2000 by and
among Hanover Compressor Company and the holders of common stock of
OEC Compression Corporation named therein. (12)[10.52]
10.54 Amendment No. 1 to Agreement and Plan of Merger dated as of November
14, 2000 and by and among Hanover Compressor Company. Caddo
Acquisition Corporation and OEC Compression Corporation (13)[10.51]
10.55 Management Agreement (13)[10.52]
10.56 Asset Purchase Agreement made on July 10, 2000 by and among Hanover
Compressor Company and Stewart & Stevenson Services, Stewart &
Stevenson Power, Inc. and PAMCO Services International, Inc.
(13)[10.53]
10.57 Lease dated as of October 27, 2000 between Hanover Equipment Trust
2000B and Hanover Compression Inc. (13)[10.54]
10.58 Guarantee dated as of October 27, 2000 made by Hanover Compressor
Company, Hanover Compression Inc. and certain subsidiaries (13)[10.55]
10.59 Participation Agreement dated as of October 27, 2000 among Hanover
Compression Inc., Hanover Equipment Trust 2000B, The Chase Manhattan
Bank, National Westminster Bank plc, Citibank N.A., Credit Suisse
First Boston and the Industrial Bank of Japan as co-agents; Bank
Hapoalim B.M. and FBTC Leasing Corp., as investors, Wilmington Trust
Company and various lenders (13)[10.56]
10.60 Security Agreement dated as of October 27, 2000 made by Hanover
Equipment Trust 2000B in favor of The Chase Manhattan Bank as agent
for the lenders (13)[10.57]
10.61 Assignment of Leases, Rents and Guarantee dated as of October 27,
2000, made by Hanover Equipment Trust 2000B in favor of The Chase
Manhattan Bank as agent for the lenders (13)[10.58]
10.62 Amendment No. 1 to Management Agreement (15)[10.62]
12.1 Computation of ratio of earnings to fixed charges and ratio of
earnings to combined fixed charges and preferred dividends*
21.1 List of Subsidiaries (15)[21.1]
23.1 Consent of PricewaterhouseCoopers LLP*
--------
(1) Such exhibit previously filed as an exhibit to the registration Statement
(File No. 333-27953) on Form S-1, as amended, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(2) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1997 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(3) Such exhibit previously filed as an exhibit to the Company's Current
Report on Form 8-K dated July 22, 1998, under the exhibit number indicated
in brackets [ ], and is incorporated by reference.
24
(4) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Third Quarter of 1998, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(5) Compensatory plan or arrangement required to be filed.
(6) Such exhibit previously filed as an exhibit to the Registration Statement
(File No. 333-30344) on Form S-3 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(7) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1998 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(8) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Second Quarter of 1999, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(9) Such exhibit previously filed as an exhibit to the Company's Annual Report
on Form 10-K for the Year Ended 1999 under the exhibit number indicated in
brackets [ ], and is incorporated by reference.
(10) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Second Quarter of 2000, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(11) Such exhibit previously filed as an exhibit to the Company's Current
Report on Form 8-K dated August 31, 2000, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(12) Such exhibit previously filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the Third Quarter of 2000, under the exhibit
number indicated in brackets [ ], and is incorporated by reference.
(13) Such exhibit previously filed as an exhibit to the Registration Statement
(File No. 333-50836) on Form S-4, as amended, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(14) Such exhibit previously filed as an exhibit to the Company's Current
Report on Form 8-K dated February 5, 2001, under the exhibit number
indicated in brackets [ ], and is incorporated by reference.
(15) Such exhibit previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, under the
exhibit number indicated in brackets [ ], and is incorporated by
reference.
* Filed herewith.
3. Reports on Form 8-K
(1) A report on Form 8-K was filed on November 9, 2000, which reported under
the caption "Item 5--Other Events" Hanover Compressor Company's financial
results for the third quarter of 2000. This report included a consolidated
statement of income for the company for the three- and nine-month periods ended
September 30, 2000 and 1999.
(2) A report on Form 8-K was filed on November 9, 2000, which reported under
the caption "Item 5--Other Events" that Hanover Compressor Company believes
that the Wall Street consensus estimates of the company's earnings of $.89 per
share for 2000 and $.28 per share for the fourth quarter of 2000 are
realizable.
(3) A report on Form 8-K/A was filed on November 13, 2000, which reported
under the caption "Item 7--Financial Statements and Exhibits" the audited
historical financial statements of the compression services division of
Dresser-Rand Company acquired by the Company in August 2000 and the pro forma
financial statements for the business acquired.
(4) A report on Form 8-K was filed on November 22, 2000, which reported
under the caption "Item 7--Financial Statements and Exhibits" certain pro forma
financial information, selected historical financial data and pro forma
combined condensed financial data of the company giving effect to the company's
purchase of the compressor services division of Dresser-Rand Company for the
nine months ended September 30, 2000 and the year ended December 31, 1999.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HANOVER COMPRESSOR COMPANY
/s/ Michael J. McGhan
By: _________________________________
Michael J. McGhan
President and Chief Executive
Officer
Date: April 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael J. McGhan President and Chief April 15, 2002
______________________________________ Executive Officer
Michael J. McGhan (Principal Executive
Officer and Director)
/s/ John E. Jackson Chief Financial Officer April 15, 2002
______________________________________ (Principal Financial and
John E. Jackson Accounting Officer)
Director April , 2002
______________________________________
Victor E. Grijalva
/s/ Ted Collins, Jr. Director April 15, 2002
______________________________________
Ted Collins, Jr.
/s/ Robert R. Furgason Director April 15, 2002
______________________________________
Robert R. Furgason
/s/ Melvyn N. Klein Director April 15, 2002
______________________________________
Melvyn N. Klein
/s/ Michael A. O'Connor Director April 15, 2002
______________________________________
Michael A. O'Connor
/s/ Alvin V. Shoemaker Director April 15, 2002
______________________________________
Alvin V. Shoemaker
26
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William S. Goldberg Director April 15, 2002
______________________________________
William S. Goldberg
Director April , 2002
______________________________________
I. Jon Brumley
Director April , 2002
______________________________________
Gordon Hall
Director April , 2002
______________________________________
Rene Huck
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Hanover Compressor Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 21, present fairly, in all material
respects, the financial position of Hanover Compressor Company and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index appearing under Item 14(a)(2) on page
21, presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 19, the December 31, 2000 consolidated financial
statements have been restated for certain revenue recognition matters.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 30, 2001, except for Note 19
as to which the date is April 15, 2002.
F-1
HANOVER COMPRESSOR COMPANY
CONSOLIDATED BALANCE SHEET
December 31,
----------------------
Restated
(See Note 19)
2000 1999
ASSETS ------------- --------
(in thousands of
dollars,
except for par value
and
share amounts)
Current assets:
Cash and cash equivalents........................ $ 45,484 $ 5,756
Accounts receivable, net......................... 223,022 93,715
Inventory........................................ 145,442 66,562
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 24,976 4,782
Prepaid taxes.................................... 19,948 16,430
Other current assets............................. 12,384 5,287
---------- --------
Total current assets........................... 471,256 192,532
Property, plant and equipment, net................. 573,596 497,465
Goodwill, net...................................... 141,973 29,791
Intangible and other assets........................ 64,931 36,722
---------- --------
Total assets................................. $1,251,756 $756,510
========== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt............. $ 2,423 $ 15,967
Short-term notes payable......................... 10,073
Accounts payable, trade.......................... 88,651 32,308
Accrued liabilities.............................. 46,705 22,065
Advance billings................................. 32,292 13,328
Billings on uncompleted contracts in excess of
costs and estimated earnings.................... 5,669 898
---------- --------
Total current liabilities...................... 185,813 84,566
Long-term debt..................................... 110,935 69,681
Other liabilities.................................. 132,895 82,566
Deferred income taxes.............................. 103,405 65,533
---------- --------
Total liabilities.............................. 533,048 302,346
---------- --------
Commitments and contingencies (Note 16)
Mandatorily redeemable convertible preferred
securities........................................ 86,250 86,250
Common stockholders' equity:
Common stock, $.001 par value; 200,000,000 shares
authorized; 66,454,703 and 57,505,874 shares
issued and outstanding.......................... 66 58
Additional paid-in capital....................... 483,737 272,944
Notes receivable--employee stockholders.......... (1,531) (3,387)
Accumulated other comprehensive income........... (457) (311)
Retained earnings................................ 151,360 100,196
Treasury stock--75,739 and 167,394 common shares,
respectively, at cost........................... (717) (1,586)
---------- --------
Total common stockholders' equity.............. 632,458 367,914
---------- --------
Total liabilities and common stockholder's
equity...................................... $1,251,756 $756,510
========== ========
The accompanying notes are an integral part of these financial statements.
F-2
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31,
--------------------------------
Restated
(See Note 19)
2000 1999 1998
------------- -------- --------
(in thousands,
except per share amounts)
Revenues and other:
Rentals................................. $254,515 $192,655 $147,609
Parts, service and used equipment....... 132,203 42,518 29,538
Compressor fabrication.................. 90,270 52,531 67,453
Production and processing equipment
fabrication............................ 79,121 28,037 37,466
Gain on sale of other assets............ 1,888 4,062 1,278
Equity in income of non-consolidated
affiliates............................. 3,518 1,188 1,369
Gain on change in interest in non-
consolidated affiliate................. 864
Other................................... 3,702 2,229 1,638
-------- -------- --------
566,081 323,220 286,351
-------- -------- --------
Expenses:
Rentals................................. 87,992 64,949 49,386
Parts, service and used equipment....... 89,128 27,916 21,735
Compressor fabrication.................. 76,754 43,663 58,144
Production and processing equipment
fabrication............................ 62,684 20,833 25,781
Selling, general and administrative..... 54,632 33,782 26,626
Depreciation and amortization........... 52,882 37,337 37,154
Leasing expense......................... 45,484 22,090 6,173
Interest expense........................ 8,685 8,786 11,716
Distributions on mandatorily redeemable
convertible preferred securities....... 6,369 278
-------- -------- --------
484,610 259,634 236,715
-------- -------- --------
Income before income taxes................ 81,471 63,586 49,636
Provision for income taxes................ 30,307 23,145 19,259
-------- -------- --------
Net income................................ 51,164 40,441 30,377
Other comprehensive (loss) income, net of
tax:
Foreign currency translation
adjustment............................. (146) (463) 152
-------- -------- --------
Comprehensive income...................... $ 51,018 $ 39,978 $ 30,529
======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Basic................................... 61,831 57,048 56,936
======== ======== ========
Diluted................................. 66,366 61,054 60,182
======== ======== ========
Earnings per common share:
Basic................................... $ 0.83 $ 0.71 $ 0.53
======== ======== ========
Diluted................................. $ 0.77 $ 0.66 $ 0.50
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-3
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
--------------------------------
Restated
(See Note 19)
2000 1999 1998
------------- -------- --------
(in thousands of dollars)
Cash flows from operating activities:
Net income................................. $ 51,164 $ 40,441 $ 30,377
Adjustments:
Depreciation and amortization............ 52,882 37,337 37,154
Amortization of debt issuance costs and
debt discount........................... 1,050 884 852
Bad debt expense......................... 3,198 1,475 349
Gain on sale of property, plant and
equipment............................... (10,421) (5,927) (2,552)
Equity in income of nonconsolidated
affiliates.............................. (3,518) (1,188) (1,369)
Gain on change in interest in non-
consolidated affiliate.................. (864)
Deferred income taxes.................... 28,843 11,396 12,358
Changes in assets and liabilities,
excluding business
combinations:
Accounts receivable.................... (90,149) (23,974) (28,337)
Inventory.............................. (38,774) (1,918) (24,169)
Costs and estimated earnings versus
billings on uncompleted contracts..... (7,964) 3,293 (3,000)
Accounts payable and other
liabilities........................... 45,693 11,969 14,358
Advance billings....................... (4,031) 3,634 2,942
Other.................................. 4,549 (9,200) (7,816)
-------- -------- --------
Net cash provided by operating
activities.......................... 31,658 68,222 31,147
-------- -------- --------
Cash flows from investing activities:
Capital expenditures....................... (279,675) (282,940) (169,498)
Proceeds from sale of property, plant and
equipment................................. 410,915 223,037 208,644
Cash used for business acquisitions, net... (196,562) (35,311) (42,581)
Cash returned from unconsolidated
subsidiary................................ 8,000
Cash used to acquire investments in
unconsolidated subsidiaries............... (4,071) (4,900) (11,264)
-------- -------- --------
Net cash used in investing
activities.......................... (69,393) (92,114) (14,699)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit facility........................... 40,400 (64,400) (4,700)
Proceeds from issuance of long-term debt... 2,825
Issuance of common stock, net.............. 59,400
Proceeds from mandatorily redeemable
convertible preferred
securities, net........................... 82,940
Proceeds from warrant conversions and stock
options exercises......................... 3,608 545 121
Repayment of long-term debt and short-term
notes..................................... (27,695) (8,357) (2,226)
Purchase of treasury stock................. (5,950)
Repayments of shareholder notes............ 1,876 7,490 602
-------- -------- --------
Net cash provided by (used in)
financing activities................ 77,589 18,218 (9,328)
-------- -------- --------
Effect of exchange rate changes on cash and
equivalents................................. (126) (73) (178)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 39,728 (5,747) 6,942
Cash and cash equivalents at beginning of
year........................................ 5,756 11,503 4,561
-------- -------- --------
Cash and cash equivalents at end of year..... $ 45,484 $ 5,756 $ 11,503
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31,
-------------------------------
Restated
(See Note 19)
2000 1999 1998
------------- ------- --------
(in thousands of dollars)
Supplemental disclosure of cash flow
information:
Interest paid, net of capitalized amounts... $ 8,874 $ 7,897 $ 10,992
========= ======= ========
Income taxes paid........................... $ 1,639 $12,065 $ 2,249
========= ======= ========
Supplemental disclosure of noncash
transactions:
Debt issued for property, plant and
equipment.................................. $ 12,922
=========
Assets sold in exchange for note
receivable................................. $ 2,783 $ 3,538 $ 1,500
========= ======= ========
Common stock issued in exchange for notes
receivable................................. $ 731
=======
Acquisitions of businesses:
Property, plant and equipment acquired...... $ 202,893 $39,105 $ 31,015
========= ======= ========
Other assets acquired, net of cash
acquired................................... $ 89,989 $ 2,784 $ 4,320
========= ======= ========
Goodwill.................................... $ 117,262 $ 6,927 $ 20,680
========= ======= ========
Liabilities assumed......................... $ (64,679) $(1,578) $ (1,261)
========= ======= ========
Deferred taxes.............................. $ (9,029) $(8,627) $(12,174)
========= ======= ========
Treasury and common stock issued............ $(139,874) $(3,300) $ (3,300)
========= ======= ========
The accompanying notes are an integral part of these financial statements.
F-5
HANOVER COMPRESSOR COMPANY
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Accumulated Notes Restated
Common stock Additional other receivable- (See Note 19)
----------------- paid-in comprehensive Treasury employee Retained
Shares Amount capital income stock stockholders earnings
---------- ------ ---------- ------------- -------- ------------ -------------
Balance at January 1,
1998................... 56,734,338 $57 $268,559 $ (218) $(10,748) $ 29,378
Conversion of warrants.. 396,960
Exercise of stock
options................ 49,646 120
Other comprehensive
income................. $ 152
Purchase of 588,400
treasury shares, at
cost................... (5,950)
Issuance of 300,000
treasury shares at
$11.00 per share....... 457 2,843
Repayment of employee
shareholder notes...... 602
Other................... (159)
Net income.............. 30,377
---------- --- -------- ----- ------ -------- --------
Balance at December 31,
1998................... 57,180,944 57 268,977 152 (3,325) (10,146) 59,755
Conversion of warrants.. 52,678 1
Exercise of stock
options................ 197,352 545
Other comprehensive
loss................... (463)
Issuance of common stock
to employees........... 74,900 731 (731)
Issuance of 183,700
treasury shares at
$17.96 per share....... 1,561 1,739
Repayment of employee
shareholder notes...... 7,490
Income tax benefit from
stock options
exercised.............. 1,176
Other................... (46)
Net income.............. 40,441
---------- --- -------- ----- ------ -------- --------
Balance at December 31,
1999................... 57,505,874 58 272,944 (311) (1,586) (3,387) 100,196
Conversion of warrants.. 684,770
Exercise of stock
options................ 994,572 1 3,607
Other comprehensive
loss................... (146)
Issuance of common
stock, net............. 2,000,000 2 59,398
Issuance of common stock
for acquisitions....... 5,269,487 5 136,569
Issuance of 91,727
treasury shares at
$35.98 per share....... 2,431 869
Repayment of employee
shareholder notes...... 1,876
Income tax benefit from
stock options
exercised.............. 8,813
Other................... (25) (20)
Net income.............. 51,164
---------- --- -------- ----- ------ -------- --------
Balance at December 31,
2000................... 66,454,703 $66 $483,737 $(457) $ (717) $ (1,531) $151,360
========== === ======== ===== ====== ======== ========
F-6
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
1. The Company, Business and Significant Accounting Policies
Hanover Compressor Company and its subsidiaries ("Hanover" or the "Company")
is a leading provider of a broad array of natural gas compression, gas handling
and related services in the United States and international markets. Hanover
provides compressor fabrication and oil and gas production equipment
fabrication operations in addition to gas processing, gas treatment, gas
measurement and power generation services to complement its compression
services. Hanover was founded in 1990 and is a Delaware corporation. In
December 1999, the Company adopted a holding company structure and merged into
the new holding company that assumed the name of Hanover Compressor Company.
The charter and by-laws of the new holding company are substantially the same
as the old Company.
Principles of Consolidation
The accompanying consolidated financial statements include Hanover and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliated
entities in which the Company owns more than a 20% interest and does not have a
controlling interest are accounted for using the equity method.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues
and expenses, as well as the disclosures of contingent assets and liabilities.
Because of the inherent uncertainties in this process, actual future results
could differ from those expected at the reporting date. Management believes
that the estimates are reasonable.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Revenue Recognition
Revenue from equipment rentals is recorded when earned over the period of
rental and maintenance contracts which generally range from one month to five
years. Parts, service and used equipment revenue is recorded as products are
delivered or services are performed for the customer.
Compressor, production and processing equipment fabrication revenue is
recognized using the percentage-of-completion method. The Company estimates
percentage-of-completion for compressor and processing equipment fabrication on
a direct labor hour-to-total labor hour basis. Production equipment fabrication
percentage-of-completion is estimated using the cost-to-total cost basis. The
average duration of theses projects is four to six months.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, accounts receivable and
notes receivable. The Company believes that the credit risk in temporary cash
investments that the Company has with financial institutions is minimal. Trade
accounts receivable are due from companies of varying size engaged principally
in oil and gas activities throughout the
F-7
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
world. The Company reviews the financial condition of customers prior to
extending credit and generally does not obtain collateral for receivables.
Payment terms are on a short-term basis and in accordance with industry
standards. The Company considers this credit risk to be limited due to these
companies' financial resources. Trade accounts receivable is recorded net of
estimated doubtful accounts of $2,659,000 and $1,730,000 at December 31, 2000
and 1999, respectively.
Inventory
Inventory consists of parts used for fabrication or maintenance of natural
gas compression equipment and facilities, processing and production equipment,
and also includes compression units and production equipment that are held for
sale. Inventory is stated at the lower of cost or market using the average-cost
method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated using
the straight-line method over their estimated useful lives as follows:
Compression equipment and facilities....................... 4 to 25 years
Buildings.................................................. 30 years
Transportation, shop equipment and other................... 3 to 12 years
Major improvements that extend the useful life of an asset are capitalized.
Repairs and maintenance are expensed as incurred. When property, plant and
equipment is sold, retired or otherwise disposed of, the cost, net of
accumulated depreciation is recorded in parts, service and used equipment
expenses. Sales proceeds are recorded in parts, service and used equipment
revenues. Interest is capitalized in connection with the compression equipment
and facilities that are constructed for the Company's use in its rental
operations. The capitalized interest is recorded as part of the assets to which
it relates and is amortized over the asset's estimated useful life.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets, including
property, plant and equipment, and goodwill whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss exists when estimated undiscounted cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. The impairment loss recognized represents the
excess of the assets carrying value as compared to its estimated fair market
value.
Goodwill
The excess of cost over net assets of acquired businesses is recorded as
goodwill and amortized on a straight-line basis over 15 or 20 years commencing
on the dates of the respective acquisitions. Accumulated amortization was
$8,902,000 and $3,822,000 at December 31, 2000 and 1999, respectively.
Amortization of goodwill totaled $5,080,000, $2,048,000 and $981,000 in 2000,
1999 and 1998, respectively.
Sale and Leaseback Transactions
The Company from time to time enters into sale and lease back transactions
of compression equipment with special purpose entities. Sale and lease back
transactions of compression equipment are evaluated for lease classification in
accordance with Statement of Financial Accounting Standards No. 13 "Accounting
for
F-8
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Leases." The special purpose entities are not consolidated by the Company when
the owners of the special purpose entities have made a substantial residual
equity investment of at least three percent that is at risk during the entire
term of the lease.
Stock-Based Compensation
In accordance with Statement of Financial Accounting Standards No. 123 (FAS
123) "Accounting for Stock-Based Compensation," the Company measures
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed in APB Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees," and has provided in Note 13, pro forma
disclosures of the effect on net income and earnings per share as if the fair
value-based method prescribed by FAS 123 had been applied in measuring
compensation expense.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events are considered other than enactments
that would change the tax law or rates. A valuation allowance is recognized for
deferred tax assets if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
Foreign Currency Translation
The financial statements of subsidiaries outside the U.S., except those
located in Latin America and highly inflationary economies, are measured using
the local currency as the functional currency. Assets, including goodwill, and
liabilities of these subsidiaries are translated at the rates of exchange at
the balance sheet date. Income and expense items are translated at average
monthly rates of exchange. The resulting gains and losses from the translation
of accounts are included in accumulated other comprehensive income. For
subsidiaries located in Latin America and highly inflationary economies,
translation gains and losses are included in net income.
Earnings Per Common Share
Basic earnings per common share is computed using the weighted average
number of shares outstanding for the period. Diluted earnings per common share
is computed using the weighted average number of shares outstanding adjusted
for the incremental shares attributed to outstanding options and warrants to
purchase common stock and convertible securities.
Included in diluted shares are common stock equivalents relating to options
of 4,258,000, 3,296,000 and 2,460,000 in 2000, 1999 and 1998, respectively,
warrants of 277,000, 712,000 and 786,000 in 2000, 1999 and 1998, respectively.
The common stock equivalents excluded from the computation of diluted earnings
per share as the effect would be anti-dilutive were approximately 212,000 and
292,000 in 1999 and 1998.
Comprehensive Income
Components of comprehensive income are net income and all changes in equity
during a period except those resulting from transactions with owners.
Accumulated other comprehensive income consists of the foreign currency
translation adjustment.
F-9
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Financial Instruments
The Company utilizes off-balance sheet derivative financial instruments with
the principal objective being to minimize the risks and/or costs associated
with financial and global operating activities by managing its exposure to
interest rate fluctuation on a portion of its variable rate debt and leasing
obligations. The Company does not utilize derivative financial instruments for
trading or other speculative purposes. The Company designates and assigns the
financial instruments as hedges of specific assets, liabilities or anticipated
transactions. The cash flow from hedges is classified in the Consolidated
Statements of Cash Flows under the same category as the cash flows from the
underlying assets, liabilities or anticipated transactions. The carrying
amounts reported in the balance sheet for all financial instruments approximate
fair value. See Notes 8 and 9.
Accounting for Derivatives
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, requires that, upon adoption, all derivative instruments
(including certain derivative instruments embedded in other contracts) be
recognized in the balance sheet at fair value, and that changes in such fair
values be recognized in earnings unless specific hedging criteria are met.
Changes in the values of derivatives that meet these hedging criteria will
ultimately offset related earnings effects of the hedged item pending
recognition in earnings. The Company adopted SFAS 133 beginning January 1,
2001, and the initial adoption of SFAS 133 did not have a material effect on
the Company's results of operations, cash flows or financial position. However,
the impact on our results of operations in the first quarter of 2001 and
subsequent periods could be material due to fluctuations in the fair value of
an option held by the counterparty to our interest rate swaps which will be
recorded in our results of operations until this option is exercised or expires
in July 2001.
Reclassifications
Certain amounts in the prior years' financial statements have been
reclassified to conform to the 2000 financial statement classification. These
reclassifications have no impact on net income.
2. Business Combinations
Acquisitions were accounted for under the purchase method of accounting.
Results of operations of companies acquired are included from the dates of such
acquisitions. The Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based upon fair value estimates
thereof. These estimates are revised during the allocation period as necessary
when information regarding contingencies becomes available to define and
quantify assets acquired and liabilities assumed. The allocation period varies
for each acquisition but does not exceed one year. To the extent contingencies
are resolved or settled during the allocation period, such items are included
in the revised purchase price allocation. After the allocation period, the
effect of changes in such contingencies is included in results of operations in
the periods the adjustments are determined. The Company's management does not
believe potential deviations between its estimates and actual values to be
material.
Year Ended December 31, 2000
In October 2000, the Company purchased the common stock of Servicios TIPSA
S.A. for approximately $7,750,000 in cash and a $7,750,000 note payable. The
note payable was repaid in January 2001.
F-10
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In September 2000, the Company purchased the Dresser-Rand Company's
compression services ("DR") division for $177,000,000 including approximately
$1,200,000 of acquisition costs. Under the terms of the agreement, $95,000,000
of the purchase price was paid in cash with the balance being paid through the
issuance to Ingersoll-Rand of 2,919,681 shares of the Company's newly issued
restricted common stock. The estimated value of the stock issued was
approximately $80,539,000, based upon quoted market price for the Company's
common stock reduced by a discount due to the restriction on the stock's
marketability based upon a third party appraisal. The purchase price is subject
to certain post-closing adjustments pursuant to the acquisition agreement which
have resulted in a $16,562,000 increase in the purchase price due to increases
in the net assets acquired. The final purchase price is still subject to
adjustments which the Company expects will not exceed approximately
$10,000,000. In connection with the acquisition, the Company has agreed to
purchase under normal business terms $25,000,000 worth of products, goods and
services from Dresser-Rand Company over a three-year period beginning December
2001.
In September 2000, the Company acquired the common stock of Gulf Coast
Dismantling, Inc. for approximately $2,947,000 in cash and 9,512 shares of the
Company's treasury stock valued at $300,000.
In July 2000, the Company completed its acquisition of PAMCO Services
International's natural gas compressor assets for approximately $45,210,000 in
cash and a $12,922,000 note payable due on April 10, 2001. The note is payable
periodically as idle horsepower is contracted. Approximately $10,599,000 of the
note payable was repaid in 2000. In connection with the acquisition, the
Company agreed to purchase under normal business terms specified levels of
equipment over a three-year period beginning October 2000.
In June 2000, the Company purchased common stock of Applied Process
Solutions, Inc. ("APSI") for 2,303,294 shares of the Company's common stock and
assumption of $16,030,000 of APSI's outstanding debt. The estimated value of
the stock issued was approximately $54,816,000, based upon quoted market price
for the Company's common stock reduced by a discount due to the restriction on
the stock's marketability based upon a third party appraisal. The assumed debt
has been repaid.
In June 2000, the Company purchased the assets of Rino Equipment, Inc. and
K&K Compression, Ltd. for approximately $15,679,000 in cash and 54,810 shares
of the Company's treasury stock valued at $2,000,000.
In June 2000, the Company purchased the common stock of Compression
Components Corporation for approximately $7,972,000 in cash and 27,405 shares
of the Company's treasury stock valued at $1,000,000.
In March 2000, the Company purchased the common stock of Southern
Maintenance Services, Inc. ("SMS") for approximately $1,500,000 in cash, 46,512
shares of the Company's common stock valued at $1,000,000 and $1,000,000 in
notes payable that mature on March 1, 2003.
Year Ended December 31, 1999
In July 1999, the Company purchased preferred stock and a purchase option
for the common stock of CDI Holdings, Inc. and its subsidiary Compressor
Dynamics, Inc. ("CDI"). In August 1999, the Company exercised its option to
purchase CDI. The total cost for CDI was approximately $18,525,000 in cash.
In August 1999, the Company purchased the stock of Victoria Compression
Services, Inc., Contract Engineering and Operating, Inc. and Unit Partners,
Inc. for approximately $16,786,000 in cash, 183,700 shares of the Company's
treasury stock valued at $3,300,000 and notes payable of approximately
$452,000.
F-11
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Year Ended December 31, 1998
In June 1998, the Company purchased the stock of Arkoma Compression
Services, Inc. for approximately $17,245,000 in cash. In October 1998, the
Company purchased the stock of Eureka Energy Systems, Inc. for approximately
$25,335,000 in cash.
Pro Forma Information
The pro forma information set forth below assumes the acquisitions of APSI
and DR in 2000 and the 1999 acquisitions are accounted for had the purchases
occurred at the beginning of 1999. The remaining acquisitions were not
considered material for pro forma purposes. The pro forma information is
presented for informational purposes only and is not necessarily indicative of
the results of operations that actually would have been achieved had the
acquisitions been consummated at that time (in thousands, except per share
amounts):
Years Ended
December 31,
-----------------------
Restated
2000 1999
----------- -----------
(unaudited) (unaudited)
Revenue.............................................. $661,512 $562,184
Net income........................................... 49,946 47,438
Earnings per common share--basic..................... 0.77 0.76
Earnings per common share--diluted................... 0.72 0.72
3. Inventory
Inventory consisted of the following amounts (in thousands):
December 31,
----------------
Restated
2000 1999
-------- -------
Parts and supplies.......................................... $ 93,308 $44,058
Work in progress............................................ 47,193 18,677
Finished goods.............................................. 4,941 3,827
-------- -------
$145,442 $66,562
======== =======
4. Compressor and Production Equipment Fabrication Contracts
Costs, estimated earnings and billings on uncompleted contracts are as
follows (in thousands):
December 31,
-----------------
Restated
2000 1999
-------- -------
Costs incurred on uncompleted contracts................... $58,302 $11,041
Estimated earnings........................................ 8,414 2,150
------- -------
66,716 13,191
Less--billings to date.................................... (47,409) (9,307)
------- -------
$19,307 $ 3,884
======= =======
F-12
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Presented in the accompanying financial statements as follows (in
thousands):
December 31,
----------------
Restated
2000 1999
-------- ------
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $24,976 $4,782
Billings on uncompleted contracts in excess of costs and
estimated earnings..................................... (5,669) (898)
------- ------
$19,307 $3,884
======= ======
5. Property, plant and equipment
Property, plant and equipment consisted of the following (in thousands):
December 31,
------------------
Restated
2000 1999
-------- --------
Compression equipment and facilities..................... $576,328 $520,403
Land and buildings....................................... 35,233 19,000
Transportation and shop equipment........................ 44,202 27,616
Other.................................................... 15,279 10,029
-------- --------
671,042 577,048
Accumulated depreciation................................. (97,446) (79,583)
-------- --------
$573,596 $497,465
======== ========
Depreciation expense was $46,211,000, $34,696,000 and $35,768,000 in 2000,
1999 and 1998, respectively. Assets under construction of $66,203,000 and
$18,937,000 are included in compression equipment at December 31, 2000 and
1999, respectively. In 2000 and 1999, $1,823,000 and $1,533,000 of interest
cost was capitalized. No interest was capitalized for 1998.
6. Intangible and Other Assets
Intangible and other assets consisted of the following (in thousands):
December 31,
-----------------
Restated
2000 1999
-------- -------
Investments in unconsolidated subsidiaries................ $26,452 $18,892
Deferred debt issuance and other transactions costs....... 16,091 10,317
Notes receivable.......................................... 14,975 9,214
Other..................................................... 12,828 1,862
------- -------
70,346 40,285
Accumulated amortization.................................. (5,415) (3,563)
------- -------
$64,931 $36,722
======= =======
Amortization of intangible and other assets totaled $1,591,000, $593,000 and
$405,000 in 2000, 1999 and 1998, respectively, exclusive of amortization of
debt issuance costs.
F-13
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The Company holds a non-controlling 60% interest in the Hanover/Enron Joint
Venture. In June 2000, the Company sold 50% of the common stock of its wholly-
owned Venezuelan subsidiary, Servicompressores, to Gaspetrol International
S.A., an affiliate of Cosacol, for $3,133,000. The sale price was comprised of
$350,000 in cash and a note receivable of $2,783,000 that is payable over 5
years at the greater of $300,000 per year or 50% of the profits of
Servicompressores. The balance is due in June 2005. The transaction resulted in
a gain of $2,133,000. In June 2000, the Company sold a 25% undivided interest
in a power generation plant for $5,000,000 resulting in a gain on disposition
of approximately $1,300,000.
In May 2000, the Company acquired 10% of the common stock of Aurion
Technologies, Inc. ("Aurion") for $2,511,000 in cash. Aurion sells and services
remote monitoring equipment and software. The investment is accounted for using
the cost method.
In September 1999, the Company acquired a 20% interest in Meter Acquisition
Company LP, LLLP for approximately $2,200,000 and a non-controlling 52.5%
interest in Hanover Measurement Services Company, LP for approximately
$2,700,000.
In December 1998, the Company restructured its relationship in the
Consortium Cosacol/Hanover (the "Corsortium"), a joint venture in which the
Company owned a 35% interest. The Company purchased all of the capitalized
construction from the Consortium for 300,000 shares of Hanover common stock
valued at $3,300,000. The capitalized construction was transferred to property,
plant and equipment in 1999. In addition, the Company acquired a 10% interest
in Cosacol for $2,000,000 in cash. During 2000, the Company acquired the
remaining 65% interest in the Consortium for $600,000.
In November 1997, Hanover acquired 35% of the common stock of Collicutt
Mechanical Services, Ltd. ("CMS") for approximately $5,608,000 in cash. The
investment is accounted for using the equity method of accounting. The excess
of the Company's investment over the underlying net equity of $703,000 is being
amortized on a straight-line basis over ten years and is included in other
assets at December 31, 2000 and 1999. During 2000, CMS sold additional shares
that reduced the Company's ownership percentage to approximately 24%,
accordingly, a change in interest gain of $864,000 was recorded in the
statement of income.
The notes receivable result primarily from customers for sales of equipment
or advances to other parties in the ordinary course of business. The notes vary
in length, bear interest at rates ranging from prime to 15% and are
collateralized by equipment.
7. Accrued Liabilities
Accrued liabilities are comprised of the following (in thousands):
December 31,
----------------
Restated
2000 1999
-------- -------
Accrued salaries, bonuses and other employee benefits..... $ 5,039 $ 1,893
Accrued leasing expense................................... 3,389 3,496
Accrued warranty.......................................... 1,607 758
Additional purchase price for DR (Note 2)................. 16,562
Accrued other............................................. 20,108 15,918
------- -------
$46,705 $22,065
======= =======
F-14
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
8. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31,
-----------------
2000 1999
-------- -------
Revolving credit facility................................ $102,500 $62,100
Subordinated promissory notes, net of unamortized
discount of $0 and $289................................. 15,364
Real estate mortgage, interest at 7.5%, collateralized by
certain land and buildings, payable through 2002........ 4,000 4,250
Other, interest at various rates, collateralized by
equipment and other assets, net of unamortized
discount................................................ 6,858 3,934
-------- -------
113,358 85,648
Less--current maturities................................. (2,423) (15,967)
-------- -------
$110,935 $69,681
======== =======
The Company's primary credit agreement provides for a $200,000,000 revolving
credit facility that matures on December 17, 2002. Advances bear interest at
the bank's prime or a negotiated rate (7.5% and 7.7% at December 31, 2000 and
1999, respectively). A commitment fee of 0.35% per annum on the average
available commitment is payable quarterly. The credit agreement contains
certain financial covenants and limitations on, among other things,
indebtedness, liens, leases and sales of assets. The credit agreement also
limits the payment of cash dividends on the Company's common stock to 25% of
net income for the respective period.
The subordinated promissory notes matured and were repaid on December 31,
2000. Approximately $11,191,000 of the subordinated promissory notes were owed
to related parties and the Company incurred interest to these parties of
$784,000 during 2000, 1999 and 1998.
Maturities of long-term debt at December 31, 2000 are (in thousands of
dollars): 2001--$2,423; 2002--$107,456; 2003--$670; 2004--$600; 2005--$435 and
$1,774 thereafter.
9. Leasing Transactions
In October 2000, the Company completed a $172,589,000 sale and lease back of
certain compression equipment. In March 2000, the Company entered into a
separate $200,000,000 sale and lease back of certain compression equipment.
Under the March agreement, the Company received $100,000,000 proceeds from the
sale of compression equipment at closing and in August 2000, the Company
completed the second half of the equipment lease and received an additional
$100,000,000 for the sale of additional compression equipment. In June 1999 and
in July 1998 the Company completed two other separate $200,000,000 sale and
lease back transactions of certain compression equipment. All transactions are
recorded as a sale and lease back of the equipment and are recorded as
operating leases. Under all the lease agreements, the equipment was sold and
leased back by the Company for a 5 year period and will continue to be deployed
by the Company under its normal operating procedures. At any time, the Company
has options to repurchase the equipment at fair market value. The Company has
substantial residual value guarantees under the lease agreements that are due
upon termination of the leases and which may be satisfied by a cash payment or
the exercise of the Company's purchase options. Any gains on the sale of the
equipment are deferred until the end of the respective lease terms. Should the
Company not exercise its purchase options under the lease agreements, the
deferred gains
F-15
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
will be recognized to the extent they exceed any residual value guarantee
payments and any other items required under the lease agreements. The Company
incurred transaction costs of approximately $4,532,000, $1,799,000 and
$1,423,000 for the 2000, 1999 and 1998 transactions, respectively. These costs
are included in intangible and other assets and are being amortized over the
respective lease terms. The following table summarizes the proceeds, net book
value of equipment sold, deferred gain on equipment sale and the residual value
guarantee for each equipment lease (in thousands of dollars):
Sale Net Book Deferred Residual
Lease Proceeds Value Gain Value Guarantee
----- -------- -------- -------- ---------------
July 1998......................... $200,000 $158,007 $41,993 $167,000
June 1999......................... 200,000 166,356 33,644 166,000
March and August 2000............. 200,000 166,922 33,078 166,000
October 2000...................... 172,589 155,692 16,897 142,299
The lease agreements call for variable quarterly rental payments that vary
with the London Interbank Offering Rate. The future minimum lease payments
under the leasing agreements exclusive of any residual value guarantee payments
(in thousands of dollars): 2001--$59,100; 2002--$60,100; 2003--$52,000; 2004--
$36,600; 2005--$15,400.
In July 1998 and in connection with the 1998 lease agreement, the Company
entered into two swap transactions to manage lease rental exposure with
notional amounts of $75,000,000 and $125,000,000 and strike rates of 5.51% and
5.56%, respectively. The differential paid or received on the swap transactions
is recognized as an adjustment to leasing expense. These swap transactions
expire in July 2001 unless they are extended for an additional two year term at
the option of the counterparty. The counterparty to this contractual
arrangement is a major financial institution with which the Company also has
other financial relationships. The Company is exposed to credit loss in the
event of nonperformance by this counterparty. The fair value of these interest
rate swaps and the options to extend their maturity is approximately $241,000
at December 31, 2000.
10. Income Taxes
The components of income before income taxes were as follows (in thousands):
Year ended December 31,
------------------------
Restated
2000 1999 1998
-------- ------- -------
Domestic............................................ $61,207 $47,741 $39,160
Foreign............................................. 20,264 15,845 10,476
------- ------- -------
$81,471 $63,586 $49,636
======= ======= =======
F-16
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The provision for income taxes consisted of the following (in thousands):
Year ended December 31,
-------------------------
Restated
2000 1999 1998
-------- ------- -------
Current tax expense (benefit):
Federal......................................... $ 3,526 $ 6,958 $ 3,421
State........................................... 499 1,412 1,741
Foreign......................................... (2,561) 3,379 1,739
------- ------- -------
Total current................................. 1,464 11,749 6,901
------- ------- -------
Deferred tax expense:
Federal......................................... 17,245 10,670 10,312
State........................................... 151 85
Foreign......................................... 11,598 575 1,961
------- ------- -------
Total deferred................................ 28,843 11,396 12,358
------- ------- -------
Total provision................................... $30,307 $23,145 $19,259
======= ======= =======
The income tax expense for 2000, 1999 and 1998 resulted in effective tax
rates of 37.2%, 36.4% and 38.8%, respectively. The reasons for the differences
between these effective tax rates and the U.S. statutory rate of 35% are as
follows (in thousands):
Year ended December 31,
-------------------------
Restated
2000 1999 1998
-------- ------- -------
Federal income tax at statutory rates............ $28,515 $22,255 $17,373
State income taxes, net of federal income tax
benefit......................................... 324 1,016 1,187
Foreign income taxes............................. 1,241 211 33
Other, net....................................... 227 (337) 666
------- ------- -------
$30,307 $23,145 $19,259
======= ======= =======
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
Year ended December
31,
--------------------
Restated
2000 1999
--------- ---------
Deferred tax assets:
Net operating losses................................ $ 30,268 $ 7,490
Alternative minimum tax carryforward................ 14,623 19,005
Other............................................... 3,265 2,346
--------- ---------
Gross deferred tax assets............................. 48,156 28,841
Deferred tax liabilities:
Property, plant and equipment....................... (145,892) (82,764)
Other............................................... (5,669) (11,610)
--------- ---------
Gross deferred tax liabilities........................ (151,561) (94,374)
--------- ---------
$(103,405) $ (65,533)
========= =========
The Company has net operating loss carryforwards at December 31, 2000 of
$86,500,000 expiring in 2006 to 2020. In addition, the Company has an
alternative minimum tax credit carryforward of $14,623,000 that does not
expire.
F-17
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In 2000, the Company recorded approximately $9,029,000 of additional
deferred income tax liabilities resulting from the 2000 acquisition
transactions. In 1999, the company recorded approximately $8,627,000 additional
deferred income tax liability resulting from the 1999 acquisitions. See Note 2
for a description of the transactions.
The Company has not recorded a deferred income tax liability for additional
income taxes that would result from the distribution of earnings of its foreign
subsidiaries if they were actually repatriated. The Company intends to
indefinitely reinvest the undistributed earnings of its foreign subsidiaries.
11. Mandatorily Redeemable Convertible Preferred Securities
In December 1999, the Company issued $86,250,000 of unsecured Mandatorily
Redeemable Convertible Preferred Securities (the "Convertible Preferred
Securities") through Hanover Compressor Capital Trust, a Delaware business
trust and wholly-owned finance subsidiary of the Company. The Convertible
Preferred Securities have a liquidation amount of $50 per unit. The Convertible
Preferred Securities mature in 30 years but the Company may redeem them
partially or in total any time on or after December 20, 2002. The Convertible
Preferred Securities also provide for annual cash distributions at the rate of
7.25%, payable quarterly in arrears, however, payments may be deferred up to 20
quarters subject to certain restrictions. During 2000 and 1999, the Company
accrued distributions of approximately $6,253,000 and $278,000, respectively
related to Convertible Preferred Securities. Each Convertible Preferred
Security is convertible into 2.7972 shares of Hanover common stock, subject to
certain conditions. The Company has fully and unconditionally guaranteed the
Convertible Preferred Securities. The Company incurred transaction costs of
approximately $3,439,000 (net of $116,000 accumulated amortization at December
31, 2000) that are included in other assets. The transaction costs are being
amortized over the term of the Convertible Preferred Securities. The fair value
of the Convertible Preferred Securities is approximately $163,659,000 at
December 31, 2000.
12. Common Stockholders' Equity
Stock Offering
In May 2000, the Company completed a private placement of 2,000,000 newly
issued shares of common stock to an institutional investor for cash of
$59,400,000 (net of $600,000 of equity issuance costs).
Stock Split
In June 2000, the Company completed a 2-for-1 stock split effected in the
form of a 100% stock dividend. All common stock, additional paid-in capital and
earnings per common share information have been restated for all periods
presented to reflect this stock split. In addition, the Board of Directors
approved an increase of authorized shares of common stock to 200,000,000.
Notes Receivable-Employee Stockholders
Under various stock purchase plans, the Company's employees are eligible to
purchase shares of Hanover stock at fair market value in exchange for cash
and/or notes receivable. The notes are collateralized by the common stock and
the general credit of the employee, bear interest at a prime rate, and are
generally payable on demand or at the end of a four-year period. The notes have
been recorded as a reduction of common stockholders' equity.
F-18
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In addition and in connection with the Company's initial public offering,
the Company issued 529,570 shares of common stock to employees at the offering
price of $9.75 in exchange for employee notes receivable.
Other
As of December 31, 2000, warrants to purchase approximately 4,000 shares of
common stock at $.005 per share were outstanding. The warrants expire in August
2005.
During 1998, the Company initiated a stock buyback program authorized to
repurchase up to 900,000 of the Company's outstanding shares to assist with
future business acquisitions and for general corporate purposes. In 1998, the
Company repurchased 588,400 shares at an average price of $10.11.
See Notes 1, 2, 5 and 13 for a description of other common stock
transactions.
13. Stock Options
The Company has employee stock option plans that provide for the granting of
options to purchase common shares. The options are generally issued with an
exercise price equal to the fair market value on the date of grant and are
exercisable over a ten-year period. Vesting of stock options issued prior to
June 1997 was accelerated as a result of completion of the initial public
offering. No compensation expense related to stock options was recorded in
2000, 1999 and 1998.
Of the options granted in 1999 and 1998, 700,000 vest 100% on July 1, 2001
and 320,000 vested immediately. The remaining options granted vest over the
following schedule, which may accelerate upon a change in the Company's
controlling ownership.
Year 1.................................................................. 10%
Year 2.................................................................. 30%
Year 3.................................................................. 60%
Year 4.................................................................. 100%
In June 2000, the Company purchased APSI that had existing stock option
programs in place. The Company converted the outstanding APSI stock options
into the Company's stock options as of the purchase date at a conversion ratio
equal to the exchange ratio under the merger agreement. As a result, 127,813
options were converted at a weighted-average per share exercise price of
approximately $12.88. Approximately 60,307 of the options vested at acquisition
with the remaining options vesting at varying dates through 2003.
F-19
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The following is a summary of stock option activity for the years ended
December 31, 2000, 1999 and 1998:
Weighted average
Shares price per share
--------- ----------------
Options outstanding, December 31, 1997........... 6,828,718 4.70
Options granted................................ 2,095,366 10.13
Options canceled............................... (84,008) 10.61
Options exercised.............................. (49,646) 2.40
---------
Options outstanding, December 31, 1998........... 8,790,430 5.95
---------
Options granted................................ 272,156 13.79
Options canceled............................... (68,230) 9.72
Options exercised.............................. (197,352) 2.76
---------
Options outstanding, December 31, 1999........... 8,797,004 6.24
---------
Options granted
APSI acquisition............................... 127,813 12.88
Options canceled............................... (11,562) 9.78
Options exercised.............................. (994,572) 3.68
---------
Options outstanding, December 31, 2000........... 7,918,683 6.63
--------- -----
Options Outstanding at December 31, 2000
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 2000:
Options
Options outstanding exercisable
---------------------------- ------------------
Weighted
average Weighted Weighted
remaining average average
life in exercise exercise
Range of exercise prices Shares years price Shares price
------------------------ --------- --------- -------- --------- --------
$0.01...................... 76,886 1.4 $0.01 76,886 $0.01
$2.30--$3.48............... 3,378,062 0.7 2.37 3,378,062 2.37
$4.57--$6.96............... 297,989 3.6 5.26 285,956 5.29
$9.57--$14.50.............. 4,117,146 7.2 10.19 1,703,507 9.93
$20.09..................... 48,600 9.3 20.09 8,598 20.09
--------- ---------
7,918,683 5,453,009
========= =========
The weighted-average fair value at date of grant for options where the
exercise price equals the market price of the stock on the grant date was $6.10
and $4.16 per option during 1999 and 1998, respectively. The Company did not
grant any stock options in 2000. The fair value of options at date of grant was
estimated using the Black-Scholes model with the following weighted average
assumptions:
2000 1999 1998
---- ------- -------
Expected life........................................... N/A 6 years 6 years
Interest rate........................................... N/A 6.0% 4.8%
Volatility.............................................. N/A 29.4% 32.6%
Dividend yield.......................................... N/A 0% 0%
F-20
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Stock-based compensation costs computed in accordance with FAS 123, would
have reduced net income by $4,598,000, $2,194,000 and $825,000 in 2000, 1999
and 1998, respectively. The pro forma impact on net income would have reduced
basic and diluted earnings per share by $.07 in 2000 and basic and diluted
earnings per share of $.04 per share in 1999 and $.02 per share in 1998. The
pro forma effect on net income for 2000, 1999 and 1998 is not representative of
the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
14. Benefit Plans
The Company's 401(k) retirement plan provides for optional employee
contributions up to the IRS limitation and discretionary employer matching
contributions. The Company made matching contributions of $594,000, $399,000
and $273,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.
15. Related Party Transactions
Hanover and GKH Partners, L.P. ("GKH"), a major stockholder of the Company,
entered into an agreement whereby in exchange for investment banking and
financial advisory services rendered by the major stockholder, the Company
agreed to pay a fee to GKH. Approximately $2,048,000 of the fees payable to GKH
is included in accrued liabilities at December 31, 2000 and 1999. This
liability was paid in 2001 and the agreement is no longer in effect.
The Company has advanced cash to certain management employees in return for
notes. The notes receivable totaled $1,589,000, bear interest at the prime
rate, mature in June 2004 and are collateralized by Company common stock owned
by the employees with full recourse. The notes and related interest will be
forgiven over a four-year period should the employee continue their employment
with the Company. The forgiveness will accelerate upon a change in control of
the Company. During 2000, the Company recognized compensation expense related
to the forgiveness of these notes receivable that totaled $105,000.
In connection with stock offerings to management, the Company has received
notes from employees for shares purchased. The total amounts owed to the
Company at December 31, 2000 and 1999 are $1,531,000 and $3,387,000,
respectively. Total interest accrued on the loans is $106,000 and $203,000 as
of December 31, 2000 and 1999, respectively.
The Company also leases compressors to affiliates of Enron Capital and Trade
Resources Corp. ("Enron"), an affiliate of a major stockholder of the Company.
Rentals of $18,586,000, $8,776,000 and $6,801,000 were paid by affiliates of
Enron in 2000, 1999 and 1998, respectively. The Company sold equipment of
approximately $5,289,000 to affiliates of Enron in 2000. Compression
fabrication of $6,320,000 was purchased by affiliates of Enron in 1999. An
affiliate of Enron also owns interest in Meter Acquisition Company LP, LLLP and
Hanover Measurement Services Company, L.P. ("HMS"). The Company charged HMS
$312,000 for general and administrative services during 2000.
In July 2000, the Company entered into a definitive merger agreement to
purchase the outstanding stock of OEC Compression Corporation. In the third
quarter of 2000, the Company and OEC entered into a management agreement under
which OEC engaged Hanover to provide day to day management services for OEC's
field and shop operations. In connection with the management agreement, the
Company billed and collected management fees that totaled $2,700,000 that are
included in parts and service revenue. See footnote 17 for subsequent events.
F-21
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The Company leases compressors to other companies owned or controlled by or
affiliated with related parties. Rental and maintenance revenues billed to
these related parties totaled $936,000, $902,000 and $859,000 during 2000, 1999
and 1998, respectively.
See Note 6 for related party investments and Note 12 for a description of
common stock transactions with related parties.
16. Commitments and Contingencies
Rent expense, excluding lease payments for the leasing transactions
described in Note 9 for 2000, 1999 and 1998 was approximately $2,159,000,
$1,320,000 and $455,000, respectively. Commitments for future minimum rental
payments exclusive of those disclosed in Note 9 under noncancelable operating
leases with terms in excess of one year at December 31, 2000 are (in thousands
of dollars): 2001--$2,951; 2002--$2,362; 2003--$2,156; 2004--$1,949; 2005--
$1,574.
In the ordinary course of business the Company is involved in various
pending or threatened legal actions. While management is unable to predict the
ultimate outcome of these actions, it believes that any ultimate liability
arising from these actions will not have a material adverse effect on the
Company's consolidated financial position, operating results or cash flows.
The Company has no commitments or contingent liabilities which, in the
judgment of management, would result in losses that would materially affect the
Company's consolidated financial position, operating results or cash flows.
17. Subsequent Events
In March 2001, the Company issued 2,500,000 shares of common stock for cash
of approximately $87,900,000 before issuance costs in connection with an equity
offering. In addition, the Company issued $192,000,000 of 4.75% Convertible
Senior Notes due March 15, 2008.
In March 2001, the Company completed its purchase of OEC Compression
Corporation for approximately 1.1 million shares of common stock and assumption
of approximately $61,900,000 in debt.
18. Industry Segments and Geographic Information
The Company manages its business segments primarily on the type of product
or service provided. The Company has five principal industry segments:
Rentals--Domestic, Rentals--International, Parts, Service and Used Equipment,
Compressor Fabrication and Production and Processing Equipment Fabrication. The
Rentals segments provide natural gas compression rental and maintenance
services to meet specific customer requirements. The Compressor Fabrication
Segment involves the design, fabrication and sale of natural gas compression
units to meet unique customer specifications. The Production and Processing
Equipment Fabrication Segment designs, fabricates and sells equipment utilized
in the production of crude oil and natural gas. Prior periods have been
restated to reflect the expansion in 2000 of the Parts, Service and Used
Equipment segment.
The Company evaluates the performance of its segments based on segment gross
profit. Segment gross profit for each segment includes direct operating
expenses. Costs excluded from segment gross profit include selling, general and
administrative, depreciation and amortization, leasing, interest, distributions
on mandatorily
F-22
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
redeemable convertible preferred securities and income taxes. Amounts defined
as "Other" include equity in income of nonconsolidated affiliates, results of
other insignificant operations and corporate related items primarily related to
cash management activities. Revenues include sales to external customers and
intersegment sales. Intersegment sales are accounted for at cost except for
compressor fabrication equipment sales which are accounted for on an arms
length basis, and the sales and resulting profits are eliminated in
consolidation. Identifiable assets are tangible and intangible assets that are
identified with the operations of a particular segment or geographic region, or
which are allocated when used jointly. Capital expenditures include fixed asset
purchases.
No single customer accounts for 10% or more of the Company's revenues for
all periods presented. One vendor accounted for approximately $41,200,000 and
$32,300,000 of the Company's purchases in 2000 and 1998, respectively.
Industry Segments
Parts,
service Production
Domestic International and used Compressor equipment
rentals rentals equipment fabrication fabrication Other Eliminations Consolidated
-------- ------------- --------- ----------- ----------- ------- ------------ ------------
(in thousands of dollars)
2000: (Restated)
Revenues from external
customers............. $173,195 $ 81,320 $132,203 $ 90,270 $79,121 $ 9,972 $ 566,081
Intersegment sales..... 1,200 31,086 89,963 3,653 7,413 $(133,315)
-------- -------- -------- -------- ------- ------- --------- ----------
Total revenues....... 173,195 82,520 163,289 180,233 82,774 17,385 (133,315) 566,081
Gross profit........... 112,859 53,664 43,075 13,516 16,437 9,972 249,523
Identifiable assets.... 493,728 286,747 21,627 311,568 92,601 45,485 1,251,756
Capital expenditures... 219,277 58,801 874 723 279,675
Depreciation and
amortization.......... 30,102 15,117 160 4,381 3,122 52,882
1999:
Revenues from external
customers............. $136,430 $ 56,225 $ 42,518 $ 52,531 $28,037 $ 7,479 $ 323,220
Intersegment sales..... 1,200 38,656 75,139 4,821 $(119,816)
-------- -------- -------- -------- ------- ------- --------- ----------
Total revenues....... 136,430 57,425 81,174 127,670 32,858 7,479 (119,816) 323,220
Gross profit........... 90,246 37,460 14,602 8,868 7,204 7,479 165,859
Identifiable assets.... 529,667 149,968 47,608 23,511 5,756 756,510
Capital expenditures... 180,593 99,535 1,469 1,343 282,940
Depreciation and
amortization.......... 24,448 11,158 702 1,029 37,337
1998:
Revenues from external
customers............. $107,420 $ 40,189 $ 29,538 $ 67,453 $37,466 $ 4,285 $ 286,351
Intersegment sales..... 1,200 7,792 54,369 2,902 $ (66,263)
-------- -------- -------- -------- ------- ------- --------- ----------
Total revenues....... 107,420 41,389 37,330 121,822 40,368 4,285 (66,263) 286,351
Gross profit........... 70,850 27,374 7,803 9,309 11,685 4,284 131,305
Identifiable assets.... 422,026 129,628 33,578 17,855 11,503 614,590
Capital expenditures... 111,289 54,830 2,524 855 169,498
Depreciation and
amortization.......... 28,383 7,128 701 942 37,154
F-23
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Geographic Data
United
States International Consolidated
-------- ------------- ------------
(in thousands of dollars)
2000: (Restated)
Revenues from external customers...... $444,094 $121,987 $ 566,081
Identifiable assets................... $936,288 $315,468 $1,251,756
1999:
Revenues from external customers...... $263,082 $ 60,138 $ 323,220
Identifiable assets................... $603,368 $153,142 $ 756,510
1998;
Revenues from external customers...... $234,999 $ 51,352 $ 286,351
Identifiable assets................... $484,269 $130,321 $ 614,590
F-24
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
19. Restatement
The transactions involved in the restatement, which are detailed further
below are: (i) the Cawthorne Channel project in Nigeria initially conducted
through the Hampton Roads joint venture; (ii) the acquisition of two
compressors in a non-monetary exchange transaction; (iii) a compressor sale
transaction; and (iv) its sale of a turbine engine. The impact of the
restatement is summarized in the tables below:
Cawthorne
Channel
Project in Acquisition of
Nigeria/Hampton Compressors In Compressor Sale of
Roads Joint Non-Monetary Sale Turbine
As Filed Venture Exchange Transaction Engine Restated
-------- --------------- -------------- ----------- ------- --------
Revenues:
Rentals............... $254,515 $254,515
Parts, service and
used equipment....... 151,707 $(12,004) $(7,500) 132,203
Compressor
fabrication.......... 96,838 $ (6,568) 90,270
Production and
processing equipment
fabrication.......... 88,572 (9,451) 79,121
Gain on sale of other
assets............... 4,113 $(2,225) 1,888
Gain on change in
interest in non-
consolidated
affiliate............ 864 864
Other................. 7,220 7,220
-------- -------- ------- -------- ------- --------
Total revenues...... 603,829 (16,019) (2,225) (12,004) (7,500) 566,081
-------- -------- ------- -------- ------- --------
Expenses:
Rentals............... 87,992 87,992
Parts, service and
used equipment....... 103,276 (7,954) (6,194) 89,128
Compressor
fabrication.......... 81,996 (5,242) 76,754
Production and
processing equipment
fabrication.......... 69,281 (6,597) 62,684
Selling, general and
administrative....... 54,606 26 54,632
Depreciation and
amortization......... 52,882 52,882
Lease expense......... 45,484 45,484
Interest expense...... 8,473 212 8,685
Distributions on
mandatorily
redeemable
convertible preferred
Securities........... 6,369 6,369
-------- -------- ------- -------- ------- --------
Total expenses...... 510,359 (11,601) (7,954) (6,194) 484,610
-------- -------- ------- -------- ------- --------
Income before income
taxes.................. 93,470 (4,418) (2,225) (4,050) (1,306) 81,471
Provision for income
taxes.................. 34,771 (1,644) (827) (1,507) (486) 30,307
-------- -------- ------- -------- ------- --------
Net income.............. $ 58,699 $ (2,774) $(1,398) $ (2,543) $ (820) $ 51,164
======== ======== ======= ======== ======= ========
Earnings per common
share:
Basic................. $ 0.95 $ 0.83
Diluted .............. $ 0.88 $ 0.77
F-25
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Restatement
As filed Items Restated
--------- ----------- ---------
Accounts receivable, net...................... $ 242,526 $(19,504) $ 223,022
Inventory..................................... 139,248 6,194 145,442
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 38,665 (13,689) 24,976
Property, plant and equipment, net............ 583,586 (9,990) 573,596
Intangible and other assets, net.............. 65,707 (776) 64,931
Total assets.................................. 1,289,521 (37,765) 1,251,756
Accrued liabilities........................... 49,205 (2,500) 46,705
Other liabilities............................. 158,661 (25,766) 132,895
Deferred income taxes......................... 105,369 (1,964) 103,405
Total liabilities............................. 563,278 (30,230) 533,048
Retained earnings............................. 158,895 (7,535) 151,360
Total liabilities and common stockholders'
equity....................................... 1,289,521 (37,765) 1,251,756
Cawthorne Channel Projection Nigeria/Hampton Roads Joint Venture
Cawthorne Channel is a project to build, own and operate barge-mounted gas
compression and gas processing facilities to be stationed off the coast of
Nigeria in performance of a contract between Global Energy and Refining Ltd
("Global") and Shell Petroleum Development Company of Nigeria Limited, the
Nigerian operating unit of The Royal/Dutch Shell Group ("Shell"). The Company
entered into a contract with Global in June 1999 to fabricate and lease the
facilities to Global to fulfill the Shell contract. Subsequently, the Company
acquired a 10% interest in Global.
In September 2000, a joint venture known as Hampton Roads Shipping Investors
II, L.L.C. ("Hampton Roads") was formed to own the gas processing facilities
and lease them to Global. The Company purchased a 25% interest in Hampton Roads
for $1,250,000 and entered into a turn-key construction contract with Hampton
Roads to construct the facilities. The equipment, which had a sale price of $51
million, was to be used pursuant to a 10-year contract on behalf of Shell to
commence September 30, 2001. In the first quarter of 2001, the scope of the
project was reduced to $43 million and the contract term was extended to 15
years with a projected start date of September 2003. As the project has not yet
started, the Company has recorded no income attributable to its equity
ownership in the venture.
The Company was constructing the equipment to be used in the gas compression
and processing project with Shell under the turn-key construction contract with
Hampton Roads and had accounted for this activity under the percentage of
completion method of accounting. Based upon the evaluation of new information
related to these transactions, the Company determined that it should not have
recognized revenue for this activity during these periods. The restatement
treats the project as if the Company had owned 100% of the project since
inception and reverses the revenue and related costs recognized under the
percentage of completion method.
In February 2002, the Company purchased the 75% interest in Hampton Roads
that it did not own. The Company now owns 100% of the venture and will
recognize the rental revenues pursuant to its contract with Global once startup
begins.
F-26
HANOVER COMPRESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Acquisition of Compressors In Non-Monetary Exchange
In the third quarter of 2000, the Company entered into an acquisition of two
compressors in a non-monetary exchange transaction with an independent oil and
gas producer. In the transaction, the Company acquired the two compressors in
exchange for certain gas reservoir rights that the Company had obtained in
settlement of a payment default by one of its customers. The Company accounted
for the transaction as an exchange of non-monetary assets and recorded $2.2
million in revenue and pre-tax income in 2000. Based upon the evaluation of new
information related to this transaction, the Company has determined that it
should not have recognized a gain on this transaction.
Compressor Sale Transaction
The Company sold 33 gas compressors to a gas pipeline system then controlled
by Enron for $12.0 million pursuant to invoices issued in December 2000. The
Company recorded $4.1 million of pre-tax income from the transaction in the
fourth quarter of 2000. In January 2001, the Company entered into an agreement
with its customer to provide transition services and settle claims between the
parties arising from the operation of the compressors prior to their sale. The
agreement also provided for the issuance of a bill of sale. Upon further
evaluation of the transaction, the Company has determined that it should have
recognized the gain on this transaction when it issued the bill of sale in
January 2001 rather than in December 2000.
Sale of Turbine Engine
In the fourth quarter of 2000, the Company entered the non-oil field power
generation market to take advantage of rising electricity demand and purchased
used turbines to carry out this effort. In connection with this effort, the
Company agreed to sell a turbine on extended credit and recognized revenues of
$7.5 million and $1.3 million of pre-tax income in the fourth quarter of 2000.
Upon further evaluation of the transaction, the Company determined that revenue
should have been recognized for this transaction at the time that
collectibility of the sales price was reasonably assured. Since full payment on
the $7.5 million turbine sale was received in the fourth quarter of 2001, the
Company recorded the sale and related $0.8 million net income in that quarter.
Reclassification
The Company determined that the deferred gain related to the 1999 and 2000
leases was calculated in error. A reclassification between property, plant and
equipment and other liabilities has been made to correct this matter. This
reclassification had no impact on net income.
F-27
HANOVER COMPRESSOR COMPANY
SELECTED QUARTERLY UNAUDITED FINANCIAL DATA
The table below sets forth selected unaudited financial information for each
quarter of the last two years:
1st 2nd 3rd 4th
quarter quarter quarter(2) quarter
------- -------- ---------- --------
(in thousands, except per share
amounts)
2000: (Restated)
Revenue................................. $90,557 $117,084 $148,960 $209,480
Gross profit............................ 48,326 55,931 64,745 80,521
Net income.............................. 11,165 12,773 12,395 14,831
Earnings per common and common
equivalent share:
Basic(1).............................. $ 0.19 $ 0.21 $ 0.19 $ 0.22
Diluted(1)............................ $ 0.18 $ 0.20 $ 0.18 $ 0.21
1999:
Revenue................................. $66,694 $ 73,875 $ 87,269 $ 95,382
Gross profit............................ 36,947 38,681 43,373 46,858
Net income.............................. 8,639 8,482 10,388 12,932
Earnings per common and common
equivalent share:
Basic(1).............................. $ 0.15 $ 0.15 $ 0.18 $ 0.23
Diluted(1)............................ $ 0.14 $ 0.14 $ 0.17 $ 0.21
--------
(1) In June 2000, the Company completed a 2-for-1 stock split effected in the
form of a 100% stock dividend. All weighted average and common equivalent
shares and earnings per common share information have been restated for
all periods presented to reflect this stock split.
(2) In conjunction with a separate review of the Company's joint ventures and
other transactions conducted by the Board of Directors in early 2002, the
Company determined that restatement was appropriate. The net effect of
this restatement for the three months ended September 30, 2000 was as
follows: (i) a decrease in revenues of $13.6 million, from $162.6 million
to $149.0 million; (ii) a decrease in gross profit of $4.9 million, from
$69.6 million to $64.7 million; (iii) a decrease in net income of $3.0
million, from $15.4 million to $12.4 million; and (iv) a decrease in
earnings per common share of $0.05 basic and $0.05 diluted. For additional
detail of the transactions involved in the restatement see Note 19 of the
Notes to Consolidated Financial Statements.
F-28
SCHEDULE II
HANOVER COMPRESSOR COMPANY
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
----------- ---------- ---------- ---------- ----------
Allowance for doubtful accounts
deducted from accounts
receivable in the balance
sheet--
2000......................... $1,729,953 $3,197,877 $2,268,541(1) $2,659,289
1999......................... 1,212,365 1,475,601 958,013(1) 1,729,953
1998......................... 971,747 348,627 108,009(1) 1,212,365
--------
(1) Uncollectible accounts written off, net of recoveries.
S-1